Journal Issue

Deposit Protection Arrangements: A Survey

Alexander Kyei
Published Date:
December 1995
  • ShareShare
Show Summary Details

I. Introduction

Most countries have adopted a comprehensive system consisting of lender of last resort facilities by the central bank, deposit guarantees of various forms, regulation, and supervision to ensure the stability of the financial system. Deposit guarantee has sometimes been seen as one way of protecting both the financial system and depositors; in some cases, increased supervision in addition to depositor protection has been tried while in two countries, less supervision but a strict disclosure regime without depositor protection was seen as a means of promoting a sound and efficient banking system.

This paper is a survey of deposit protection schemes and it is the first part of a broader project on deposit guarantee arrangements. It compares the key elements of various deposit protection systems around the world. It was motivated by the need for such a survey. 1/ The paper is partly based on responses to a 1992 Questionnaire on Bank Supervision and Deposit Insurance to country desk economists in the Fund, which posed in the area of deposit insurance the following questions: (1) is there a formal arrangement and, if not, how is the implicit system established; (2) what kind of legislation establishes the formal deposit guarantee scheme; (3) is the arrangement a mere government guarantee or is there a fund; (4) who bears the financial liability for compensating depositors; (5) which deposits are covered; and (6) what are the coverage limits. A total of 142 Fund member countries were surveyed and the response rate was about 73 percent. 2/ After identifying the explicit and implicit systems, the information from the Questionnaire was supplemented by other information from Fund reports and other sources. It needs to be emphasized that countries continuously change their schemes in response to developments in the financial system and while an attempt was made to update the information at end-May 1995, it is likely that some of the information (especially those on the European Union member states) would already be out-dated by the time this paper is published. The discussion is on the basis of the following regional grouping: Africa, Asia, Europe I, Europe II, the Middle East, and Western Hemisphere. 3/

The paper first identifies countries under two types of deposit protection arrangements: explicit and implicit. Most industrialized countries have explicit deposit guarantee arrangements. There is, however, an absence of such schemes in most parts of Africa and Asia (including most New Industrialized Countries (NICs)). There are also recent developments where explicit (Argentina) and implicit deposit guarantees (New Zealand) have been officially rescinded and replaced by tougher disclosure and other standards although Argentina reinstituted a deposit guarantee in April 1995. Subsequently, the paper deals with explicit systems, identifying the types of deposits and institutions covered and the coverage limits. A number of arrangements maintain a fund for reimbursing depositors and the paper looks at how these funds are administered, and the sources of funding. Section II describes the key features of deposit protection arrangements and how the schemes in the various countries fit within the features. Section III presents some conclusions.

A country case summary of the various explicit systems is provided in the Appendix. 1/

II. Arrangements for Protecting Bank Deposits

1. Types of systems

Deposit guarantee is only a part of the various arrangements for protecting the financial system and, therefore, not all countries operate formal deposit insurance schemes. Although a formal scheme may not be in place, there could be an implicit guarantee of deposits to the extent that governments may go out of their way to guarantee the stability of the financial system. In these cases, depositors have assurances implied by government action either through precedence or stated intention. Two types of guarantees are therefore identified: explicit guarantees, where formal deposit protection arrangements exist, and implicit guarantees, where it is taken for granted or based on past experience that the government is bound to take steps to protect the banking system.

The basic features of implicit arrangements are: (1) the absence of written law such that legal obligation is absent and possible assistance can be judged by past behavior (tradition) of the government or by statements of officials; (2) absence of laid down rules regarding the coverage limits and form of compensation while funding by government in the event of failure is discretionary; and (3) the absence of earmarked funds for assistance. 2/Table 1 shows that implicit deposit protection systems are more prevalent in developing countries where most banks are government-owned and the governments expected to resolve bank failures. In such cases, private banks may be allowed to fail. Under an implicit system, both small and large depositors may be protected. Similarly, troubled banks may or may not be liquidated and as mentioned above, private banks could be liquidated while publicly-owned ones may possibly be rehabilitated or merged with stronger banks, thereby saving the government the immediate cost of reimbursing depositors. The advantage of implicit systems is that the government does not have to set aside a fund for that purpose. On the other hand, the government may be forced to fund the system once a need arises. If government funding takes place, bank owners typically bear little costs while taxpayers bear the brunt of the cost of the salvage operation.

Table 1.Types of Deposit Protection Systems in the Countries Surveyed
Explicit Deposit SchemeImplicit Deposit SchemeNone
AfricaMiddle EastAfricaEurope IIAsia
KenyaKuwaitBeninEstoniaNew Zealand
NigeriaLebanonBurkina FasoKazakhstan
UgandaWestern HemisphereCentralRepublic
IndiaColombiaCôte d’IvoireUkraine
JapanDominicanEquatorial Guinea
Marshall IslandsRepublicMiddle East
MicronesiaEl SalvadorGabonEgypt
Trinidad & TobagoSouth AfricaIsrael
Europe ITogoJordan
AustriaUnited StatesZaireLibya
Czech RepublicZimbabweSaudi Arabia
GreeceHong KongHemisphere
IrelandKoreaCosta Rica
NorwaySri LankaJamaica
Slovak Republic
SpainEurope I
United Kingdom
Sources: Questionnaire; Recent Economic Developments; and Staff Reports. Last update: May 1995.
Sources: Questionnaire; Recent Economic Developments; and Staff Reports. Last update: May 1995.

In Africa, deposit protection is predominantly in the form of implicit government guarantee, mainly because the financial systems are not very well developed and the banks are predominantly government-owned. Even in such cases, only a few countries such as Ghana and Senegal, have reimbursed depositors. In most countries banks have not been allowed to fail.

In Asia, 12 out of the 20 countries surveyed have implicit schemes, while in the industrialized countries, only Australia has an implicit system. In the Middle East most countries have implicit arrangements and almost one-half of the countries in the Western Hemisphere have implicit arrangements, including Brazil, Ecuador, and Jamaica (see/Tables 1 and 2).

A new approach was adopted by Argentina and New Zealand where there were explicit statements regarding the absence of government guarantee of deposits. In the case of New Zealand, an implicit guarantee was rescinded (and replaced by strengthened disclosure requirements) while in Argentina an explicit deposit arrangement was abolished (in favor of supervision-cum-disclosure) to put in place systems that make depositors and managers and owners of banks responsible for their actions. Following the Mexican crisis, banks faced massive deposit withdrawals in Argentina and the government set up a US$2.5 billion fund to help banks, and reintroduced an explicit deposit guarantee in April 1995.

Under explicit deposit protection, the arrangement is normally explicitly stated in a statute. First, some kind of legislation, whether the constitution, central bank law or banking law would require the establishment of a guarantee system (see Tables 3 and 4). Typically the statute would specify the types of institutions and deposits covered, coverage limits, management and membership, funding arrangements, and procedures for the resolution of bank failures.

Table 2.Regional Distribution of Deposit Protection Arrangements 1/
Explicit Systems
Type of SystemMembershipFundingManagement
Europe I223117136775
Europe II7----------------
Middle East102111--1--
Western Hemisphere91164926--4
Source: Questionnaire; Recent Economic Developments; and Staff Reports.Last update: May 1995.

Due to the lack of some information on Bangladesh, El Salvador, Greece, Poland, Slovak Republic, and Sweden, the numbers may not add up and does not necessarily match totals in Table 7. Under “Administration”, Iceland has one official and one private.

Source: Questionnaire; Recent Economic Developments; and Staff Reports.Last update: May 1995.

Due to the lack of some information on Bangladesh, El Salvador, Greece, Poland, Slovak Republic, and Sweden, the numbers may not add up and does not necessarily match totals in Table 7. Under “Administration”, Iceland has one official and one private.

Table 3.Explicit Deposit Protection Arrangements--Agency, Statute, Management, and Membership
CountryDate EstablishedName of AgencyStatuteManagementMembership
Kenya1985Deposit Protection Fund BoardBanking Act No. 17 1985OfficialCompulsory
Nigeria1988Nigerian Deposit Insurance Corp. (NDIC)NDIC Decree No. 22OfficialCompulsory
Tanzania1993Deposit Insurance Fund (DIF)Financial Inst. Act 1991OfficialCompulsory
Uganda1995Deposit Insurance FundFinancial Inst. Act 1993OfficialCompulsory
Bangladesh1984Deposit Insurance FundDeposit Insurance Ordinance 1984OfficialCompulsory
India1962Deposit Insurance and Credit Guarantee Corp. (DICGC)DICGC Act 1961PrivateCompulsory
Japan1971Deposit Insurance Corporation (DIC)Deposit Insurance LawJointCompulsory
Marshall Islands1975Federal Deposit Insurance Corp. (FDIC)Banking ActOfficialVoluntary
Micronesia1963Federal Deposit Insurance Corp. (FDIC)Banking ActOfficialVoluntary
Philippines1963Philippine Deposit Insurance Corp. (PDIC)Republic Act 3591/7800JointCompulsory
Taiwan1985Central Deposit Insurance CorporationDeposit Insurance Act, 1985OfficialVoluntary
Europe I
Austria1979Deposit Guarantee FundCredit System ActPrivateCompulsory
Belgium1985Rediscount and Guarantee InstituteRoyal Order 175 and March 1982 legislationJointVoluntary
Czech Republic1994Deposit Insurance FundThe Act of July 8, 1994OfficialCompulsory
Denmark1988Deposit Insurance FundAct 850, 1987; Order 118, 1988PrivateCompulsory
Finland1969Deposit Guarantee Fundn.a.n.a.Compulsory
France1980Deposit Guarantee FundBanking Act of 1984PrivateVoluntary
Germany1966Deposit Security Fund, Savings Bank Security Fund and Credit Coop. Security SchemeGerman Bank Association Deposit Protection Fund LawPrivateVoluntary
Hungary1993National Deposit Insurance FundAct on Natl. Dep. Ins. FundOfficialCompulsory
Iceland1985DIF for Savings Banks; DIF for Commercial Banks.Acts 86 and 87/1985Private/OfficialVoluntary/Compulsory
Iceland1989Deposit Protection Account (Central Bank)Central Bank Act, 1989; Building Societies Act, 1989OfficialCompulsory
Italy1987Interbank Deposit Protection Fundn.a.PrivateVoluntary
Luxembourg1989Association Guarantee Depositsn.a.PrivateCompulsory
Netherlands1979Collective Guarantee Schemen.a.JointCompulsory
Norway1961Deposit Guarantee Fundn.a.JointVoluntary
Poland1995Banking Guarantee FundLaw on Banking Guarantee Fund, 1994n.a.n.a.
Portugal1992Deposit Guarantee Fundn.a.Jointn.a.
Spain1977Deposit Guarantee FundRoyal Decree Law 4 & 18OfficialVoluntary
Switzerland1984Deposit Guarantee Schemen.a.OfficialVoluntary
Turkey1983Turkish Deposit Insurance Fundn.a.JointCompulsory
United Kingdom1982Deposit Protection FundBanking Act of 1979 and 1997OfficialCompulsory
Middle East
Lebanon1967National Deposit Guarantee Companyn.a.PrivateCompulsory
Western Hemisphere
Argentina1979 (1995)SEDESALaw 24, 485JointCompulsory
Canada1967Canada Deposit Insurance CorporationDeposit Insurance Corporation Act of CanadaOfficialCompulsory
Chile1986Superintendent of Banks.Banking LawOfficialVoluntary
Colombia1985Financial Institution Guarantee FundBanking Law 1965OfficialCompulsory
Dominican Republic1962Savings Account InsuranceNational Housing Bank LawJointVoluntary
El Salvador1991n.a.Law on Financial Institutions 1991n.a.n.a.
Mexico1986Bank Savings Protection FundCredit Institutions LawOfficialCompulsory
Peru1993Deposit Insurance FundBanking Law 1991JointVoluntary
Trinidad & Tobago1986Deposit Insurance CorporationFinancial Institutions Act 1986OfficialCompulsory
United States1934Federal Deposit Insurance Corp. (FDIC)Federal Reserve ActOfficialVoluntary
Venezuela1985FOGADE/BANAPCharter of Deposit Guarantee and Bank Protection FundJointCompulsory
Sources: Questionnaire; GAO (1991); and Talley and Mal (1990).Last update: May 1995.Note: n.a. means either not applicable or not available.
Sources: Questionnaire; GAO (1991); and Talley and Mal (1990).Last update: May 1995.Note: n.a. means either not applicable or not available.
Table 4.Comparison of Deposit Protection Arrangements--Summary of Survey Results
CountryType 1/Established As 2/Statutory Basis 3/Funding 4/5/
Burkina FasoImplicitGovernmentNoneBudget
ChadImplicitGovernmentNoneBanks/Central Bank
Côte d’IvoireImplicitGovernmentTraditionBudget
Equatorial GuineaImplicitGovernmentTraditionBudget
KenyaExplicitFundFin. LawBanks/Central Bank
NigeriaExplicitFundDep. Ins. ActBanks
South AfricaImplicitImpliedNonen.a.
TanzaniaExplicitFundFin. LawBanks/Budget
UgandaExplicitFundFinancial LawBanks/Budget
BangladeshExplicitCentral BankDep. Ins. ActBanks
Hong KongImplicitImpliedTraditionBudget
IndiaExplicitFundCentral BankBanks/Central Bank
JapanExplicitFundDep. Ins. ActBanks/Central Bank
MalaysiaImplicitImpliedTraditionCentral Bank
Marshall IslandsExplicitFundFin. LawBanks
MicronesiaExplicitFundFin. LawBanks
New ZealandNonen.a.n.a.n.a.
PhilippinesExplicitFundDep. Ins. ActBanks/Central Bank
Sri LankaImplicitImpliedTraditionCentral Bank
TaiwanExplicitFundDep. Ins. ActBanks/Budget
ThailandImplicitImpliedCentral BankBanks/Central Bank
Europe I
AustriaExplicitGovernmentDep. Ins. ActBanks
Czech Rep.ExplicitFundFin. LawBanks/Central Bank
DenmarkExplicitFundDep. Ins. ActBanks
FinlandExplicitFundDep. Ins. ActBanks/Budget
GreeceExplicitn.a.Dep. Ins. Actn.a.
HungaryExplicitFundDep. Ins. ActBanks
IcelandImplicitFundFin. LawBanks
IrelandExplicitFundFin. LawBanks
LuxembourgExplicitGovernmentDep. Ins. ActBanks
NetherlandsExplicitOtherFin. LawBanks/Central Bank
NorwayExplicitFundFin. LawBanks/Central Bank
PolandExplicitGovernmentDep. Ins. ActBudget/Central Bank
PortugalExplicitFundFin. LawBanks
RomaniaImplicitNoneFin. LawBudget
SlovakiaExplicitGovernmentFin. LawBudget
SpainExplicitFundDep. Ins. ActBanks/Central Bank
TurkeyExplicitFundCentral BankBanks/Central Bank
United KingdomExplicitFundFin. LawBanks/Central Bank
Europe II
KazakstanImplicitImpliedFin. LawBanks
Kyrgyz RepublicImplicitImpliedFin. LawBanks
RussiaImplicitImpliedFin. LawBanks
Middle East
Iran, Islamic Republic ofImplicitGovernmentNonen.a.
IsraelImplicitImpliedTraditionCentral Bank/Budget
LebanonExplicitFundDep. Ins. ActBanks/Central Bank
Libyan Arab JamahiriyaImplicitFundNonen.a.
Saudi ArabiaImplicitFundNonen.a.
United Arab EmiratesImplicitFundTraditionBudget
Western Hemisphere
BoliviaImplicitImpliedCentral Bankn.a.
BrazilImplicitImpliedTraditionCentral Bank
CanadaExplicitFundDep. Ins. ActBanks/Budget
ChileExplicitGovernmentFin. LawBudget
ColombiaExplicitFundFin. LawBanks
Costa RicaImplicitImpliedIns. LawBudget
Dominican RepublicExplicitFundFin. LawCentral Bank
El SalvadorExplicitGovernmentFin. LawOther
Western Hemisphere
MexicoExplicitFundFin. LawBanks/Central Bank
PeruExplicitFundFin. LawBanks/Budget
Trinidad & TobagoExplicitFundCentral BankBanks/Central Bank
UruguayImplicitImpliedTraditionCentral Bank
United StatesExplicitFundDep. Ins. ActBanks/Budget
VenezuelaExplicitFundFin. LawBanks/Central Bank
Sources: Questionnaire; Recent Economic Developments; and Staff Reports. Last update: May 1995.Notes: n.a. means either not applicable or not available.

Implicit: Implicit Guarantee; Explicit: Explicit Guarantee.

Government: Government Guarantee; Fund: Insurance Fund; Implied: Implied Guarantee; Other: Other Guarantee.

Central Bank: Central Bank Act; Dep. Ins. Act: Deposit Insurance Act; Constitution: Constitutional Guarantee; Fin. Law: A Law on Financial Institutions

Budget: Government Budget; Central Bank: Central Bank; Banks: Participating Banks; Other: Other Arrangement.

Banks may imply contribution while Central Bank and Budget could be either contribution or loans.

Sources: Questionnaire; Recent Economic Developments; and Staff Reports. Last update: May 1995.Notes: n.a. means either not applicable or not available.

Implicit: Implicit Guarantee; Explicit: Explicit Guarantee.

Government: Government Guarantee; Fund: Insurance Fund; Implied: Implied Guarantee; Other: Other Guarantee.

Central Bank: Central Bank Act; Dep. Ins. Act: Deposit Insurance Act; Constitution: Constitutional Guarantee; Fin. Law: A Law on Financial Institutions

Budget: Government Budget; Central Bank: Central Bank; Banks: Participating Banks; Other: Other Arrangement.

Banks may imply contribution while Central Bank and Budget could be either contribution or loans.

In Africa there are only four explicit arrangements (Kenya, Nigeria, Tanzania, and Uganda). Those in Kenya and Nigeria have not been often used because banks have not been allowed to fail. The arrangements in Tanzania and Uganda are very recent. In Asia, seven countries have explicit arrangements, but of these systems, Marshall Islands and Micronesia are extensions of the U.S. system. All the European Union (EU) member states currently operate some form of explicit deposit guarantee arrangement. There are eleven arrangements in the Western Hemisphere and of these, those in Argentina, Canada, Chile, the United States, and Venezuela have been actively used to protect depositors.

2. Types of deposits covered under explicit arrangements

Deposits are funds lodged at banks for various purposes and the variety of deposits depends on the sophistication of the banking system. Deposits include transaction and payroll accounts, demand deposits, savings deposits, time deposits, and certificates of deposit (CDs). The owners of such deposits would include individuals, enterprises, government agencies, money managers, investment companies, brokers, other banks, nonprofit organizations, and pension funds.

Under explicit arrangements, the statutes specify the types of deposits that would be covered and reimbursed in case of the failure of a bank; this normally ties in with the objectives for the arrangement (Table 6). Where the aim is broad, most types of deposits are covered. Table 6 shows the types of deposits covered under explicit deposit protection arrangements. Austria, the Czech Republic, Kenya, Luxembourg, the Netherlands, and Turkey restrict coverage to households.

Table 5.Comparison of Explicit Deposit Insurance Schemes--Coverage and Funding
Coverage LimitFunding
CountryType of DepositsNational CurrencyUS$ Equivalent 1/BasisTypeSourceBank’s Premium
KenyaIndividual depositsK Sh 100,0002,100Per depositorFundedBanks & loansMin. K Sh 100,000;

Max. 0.4% of deposits
NigeriaAll except foreign and InterbankN50,0002,270Per depositorFundedBanks & loans0.937 of 1% of deposits
TanzaniaAll except foreign and interbankT Sh 250,000480Per depositorFundedBanks and govt.0.1% of deposits
UgandaAll except foreign and interbankU Sh 3 million3,000Per depositorFundedBanks and govt.0.2% of deposits
BangladeshAll except foreign & interbankTk 60,0001,500Per depositorFundedBanks0.04% of total deposits
IndiaAll except banks & govt. dep.Re 30,000960Per depositorFundedBanks & loans0.04% of total deposits
JapanDemand and time in domestic currency¥10 million100,260Per depositorFundedBanks & loans0.012% of insured deposits
Marshall IslandsAllUS$100,000100,000Per depositorFundedBanks & loansvariable
MicronesiaAILUS$100,000100,000Per depositorFundedBanks & loansvariable
PhilippinesAll except interbank
3,700Per depositorFundedBanks & loans0.002 of deposits
TaiwanChecking, demand, time, trust funds (except foreign and interbank)NT$1 million38,500Per depositorFundedBanks & govt.1.5 cents per US$100 of insured deposits
Europe I
AustriaHouseholdS 200,00018,000Per depositorUnfundedBanksn.a.
BelgiumAll except foreign and interbankBF 0.5 million12,500Per depositorFundedBanks0.02% of BF liabilities
Czech RepublicIndividual deposits80% of deposits up to a limit of3,565Per depositorFundedBanks and loans0.5% of total deposits
DenmarkMost (including foreign currency)DKr 250,00041,100Per depositorFundedBanksMax 0.2% of deposits
FranceDomestic currency (excluding interbank)F 400,00074,800Per depositUnfundedBanksVariable: depends on loss
Finland 2/All deposits100 percentPer depositorFundedBanks and loansBetween 0.01% and 0.05% of total assets
GermanyAll except interbankMaximum 30% of bank’s liable capitalPer depositorFundedBanks0.03% of deposits
HungaryAll except interbankFt 1 million9,000Per depositorFundedBanks0.2% of total deposits
IcelandAll80% (commercial banks)

67% (savings banks)
Per depositorFundedBanks0.5% and 0.15% respectively for commercial and savings banks
IrelandDomestic currency80% of 1st £5,000

70% of next £5,000

50% of next £5,000
80% of 1st 3,200

70% of next 3,200

50% of next 3,200
Per depositorFundedBanks0.2% of deposit; minimum of £20.000
ItalyAll except Interbank100% of 1st 200 million

Lit and 80% of next

800 million
122,700-526.000Per depositUnfundedBanksCallable based deposits and loans less capital and reassessment
Luxembourg.All deposits of individuals (including foreign currency)Lux F 500,00015,200Per depositUnfundedBanksBased on percentage of loss to be met
NetherlandsAll deposits of individualsf. 40,00023,050Per depositorUnfundedBanks & loansn.a.
Norway 3/All depositeNo limitNo limitPer depositorFundedBanks & loans0.015% of total assets
Polandn.a.Maximum 90% of ECU 3,000n.a.n.a.n.a.n.a.
PortugalDemand, time and100% up to set limit.Per depositorFundedBanks0.2% of deposits
foreign currencythen 75%, 50%
SpainAll except interbankPtas 1.5 million11,400Per depositorfundedBanks, central bank and loans0.15% and 0.10% of deposits
SwitzerlandSomeSw F 30,00022,875Per depositUnfundedBanks & loansVariable: depends on banks’ balances and total deposits
TurkeyHouseholdTL 3 million 4/83Per depositorFundedBanks & loans0.3% of insured deposits
KingdomDomestic currency except interbank£20,00030,800Per depositorFundedBanks & loansnot to exceed 0.3% of sterling deposits
Middle East
KuwaitAllNo. limit.Per depositorUnfundedGovernmentNone
LebanonDomestic currencyLL 30,000.18Per depositorFundedBanks0.05-0.02 of deposits
ArgentinaAll local and foreign currency demand, time and savings (including interbank)Arg$10,000 for 90 days deposit Arg$2C,000 for deposits exceeding 90 days10,000

Per depositorFundedBanks, central bank and loans0,36 to 0.72 percent of average deposits per year.
CanadaDemand, time, retirement and pension (excluding interbank)Can$60,000.42,800Per depositorFundedBanks & loans0.16 of 1% of insured deposits
ChileTime, demand, foreign90% of demand deposits up to Ch$120/year3,000Per depositorUnfundedGovernmentNone
ColombiaDomestic currency25% of total or Col$10 million12,000Per depositorFundedBanksOn short-term liabilities Savings & housing 0.09%, others 0.15%
Dominic an RepublicSavings and fixed term100%; max. RD$8,000.8,000Per depositorFundedBanksn.a.
El Salvadorn.a.C 30,0003,400Per depositorUnfundedGovernmentn.a.
MexicoMost including foreign currency deposits100 percentPer depositorFundedBanks0.3% of covered liabilities

0.75% of total deposits
PeruDeposits in domestic currencyS1. 4.6002,100Per depositorFundedBanks & loans
& TobagoDemand, savings & timeTT$50,0008, 500Per depositorFundedBanks & loans0.2% of average deposit liabilities
United States5/AllUS$100,000100,000Per depositorFundedBanks & loansvariable: average of 0.243 for banks and 0.248 for thrifts in 1994
VenezuelaDomestic currencyBs 4 million23,500Per depositorFundedBanks & loans0.5% of total deposits every six months.

June 1994 end of period exchange rate.

Also has two unfunded systems for cooperative and savings banks.

Savings banks DIF does not cover interbank deposits; no limitations set for commercial banks DIF.

Currently no limit.

Premium is risk-based. Basic average limit is US$100,000 but funds in different ownership categories are separately insured.

Sources: Questionnaire; Recent Economic Developments; Staff Reports; Internal IMF reports; GAO (1991); and Talley and Mal (1990).Last update: May 1995.Note: n.a. means either not applicable or not available.

June 1994 end of period exchange rate.

Also has two unfunded systems for cooperative and savings banks.

Savings banks DIF does not cover interbank deposits; no limitations set for commercial banks DIF.

Currently no limit.

Premium is risk-based. Basic average limit is US$100,000 but funds in different ownership categories are separately insured.

Table 6.Types of Deposits Covered Under Explicit Arrrangements
Households OnlyExcludes Interbank DepositsExcludes Foreign Currency DepositsAll Except Interbank DepositsAll Except Foreign Currency DepositsAll Deposits
Marshall IslandsX
Europe I
Czech RepublicXX
Europe I
Norway 1/X
United KingdomXX
Middle East
Dominican Republic
El SalvadorX
Western Hemisphere
Trinidad &Tobago
United StatesX

Interbank deposits not covered under Savings Banks DIF.

Source: Questionnaire; Recent Economic Developments; and Staff Reports. Last update: May 1995.

Interbank deposits not covered under Savings Banks DIF.

Interbank deposits, deposits in foreign currency, deposits in branches of foreign banks, and deposits in branches in other countries are treated differently by the various arrangements. Most schemes exclude interbank deposits. Germany and the Philippines cover all deposits except interbank deposits. The justification for the exclusion of interbank deposits is that they are banks’ funds, and banks are deemed to possess the capability for assessing the financial health of others and, therefore, expected to be in a position to minimize their exposure to risk. However, unless the coverage limit is very high, interbank deposits may be an insignificant amount.

Twelve countries do not cover deposits in foreign currency. Foreign currency deposits are sometimes excluded because of the difficulty in specifying the limits due to changing exchange rates. The holding of foreign currency deposits could also have a very limited effect on the payments system if it constitutes an insignificant share of total deposits. Colombia, El Salvador, and France exclude foreign deposits while covering all others. 1/Table 6 shows that a number of countries exclude either interbank deposits or foreign deposits. Japan, Nigeria, Tanzania, Uganda, and the United Kingdom exclude both interbank and foreign currency deposits.

The exclusion of deposits in branches of foreign banks implies that some depositors in the host country may suffer losses in the event of the failure of those branches. In the EU and the United States, branches of foreign banks are covered but this is not the case in Japan. On the other hand, the exclusion of deposits in other countries is often based on the argument that those deposits would normally not have any impact on the home country’s payment system. In the EU, only Germany requires that branches in other countries be insured; Japan also excludes coverage of Japanese banks’ branches abroad. The host country could also require that deposits with branches of foreign banks be guaranteed. Under some arrangements, such as in Italy, the legislation requires that deposits in foreign branches be insured only if the host country does not offer coverage. 1/

3. Types of institutions covered

The types of institutions covered depend on the objectives of the arrangement. Where it is to promote the development of some particular group of institutions such as savings banks, only those institutions are covered as in the case of the Dominican Republic. Where the purpose is to maintain an existing structure (such as in Germany, India, and the United States), all groups of depository institutions are covered but sometimes by separate agencies. In other cases, there are separate agencies for other reasons as in Belgium, Finland, Iceland, Norway, and Spain (see the Appendix). To a large extent where the government seeks to promote or protect some institutions, there is government participation in the funding and administration of the agency. Also, the extent of government involvement sometimes determines the institutions covered: where there is no government involvement, only the private commercial banks are involved. On the other hand, where the purpose is to protect the entire banking system, the legislation requires that all banks be covered.

4. Coverage limits

Coverage refers to the financial liability of the insurer to the depositor in the event of the inability of the insured to honor the depositor’s claim. The statutes governing deposit protection arrangements often specify when an institution is deemed to be incapable of paying depositors and stipulate procedures for reimbursing insured depositors. For instance, under the EU guidelines, an institution is considered insolvent if that institution fails to refund deposits 10 days after a claim has been made. 2/ The longer it takes to compensate depositors, the faster the spill-over effects to other institutions--both distressed and sound banks.

Table 5 shows that limits are established either for each account (per deposit) or for each individual (per depositor). The disadvantage with the limits on each account (“per deposit”) is that depositors can increase the coverage limit through multiple accounts or through third parties if it is not restricted to one depositor. Under a “per depositor” limit, if an individual has a demand deposit and a savings deposit in the same institution, both accounts are put together and the limit applied to the sum. In Peru, if a depositor has accounts with more than one failed institution, reimbursement will be applied to deposits of only one institution. The table shows that only four explicit schemes (France, Italy, Luxembourg, and Switzerland specify coverage limits per deposit account. Between the coverage limit and the type of deposit, however, it is possible to manoeuvre for a multiple of the stated limit, especially if the rules are not clear on joint accounts and those held on behalf of customers, such as pension funds.1/

Coverage limits also vary across countries. Where the objective is to protect small depositors as in the United Kingdom, coverage is limited to individuals and to an amount deemed to be the average deposits of that group, currently approximately £20,000. However, if the resolution of a failed institution results in a merger or rehabilitation, the objective would have been more than met since it would, in effect, cover uninsured depositors as well. On the other hand, enterprises will be covered, and coverage extended to some uninsured depositors if the objective is wider than the mere protection of small depositors. For instance, in Italy the coverage limit is between Lit 200 million and Lit 1 billion, while in Germany it is set in terms of the liable capital (paid up endowment capital and reserves) of the respective bank per depositor.

Where the arrangement also seeks to reduce moral hazard on the part of depositors, there is an element of coinsurance under which the insured is responsible for some amount of the loss, while the insurer is liable for the remainder. Coinsurance is established either as a deductible where the depositor loses a specified percentage of the covered amount, say 75 percent in the case of the United Kingdom, or is responsible for a specified fraction of the loss at various levels of coverage, say 100 percent of the first Lit 200 million and 80 percent of the next Lit 800 million in the case of Italy. The systems in Chile, Colombia, the Czech Republic, Ireland, and Portugal, entail some form of coinsurance. In France, insurance coverage excludes excessively remunerated deposits and in Argentina, the central bank has the option to exclude from the coverage, deposits with yields more than 2 percentage points above a specified reference rate. At the end of the spectrum is 100 percent coverage under which all deposits are covered, such as in Kuwait and Norway. Some arrangements also specify how the coverage limit should be adjusted--either through indexation or periodic adjustments. Such adjustments may reflect inflation as in Peru or personal income growth as in the Netherlands. Under the U.S. system, the coverage limit has been raised five times, the last increase was in 1980 from US$40,000 to the current US$100,000 per depositor.

5. Management and membership

Four main administrative types of explicit deposit protection arrangements are identified: (1) purely government-owned and officially administered, which is funded by the government. These tend to have the highest potential for moral hazard, because banks have no share in the cost of resolving failed banks; (2) officially-administered by a public corporation and partially funded by banks; (3) jointly-administered by representatives from banks and the government and funded by banks; and (4) privately-administered, where depositories self-insure each other (mutual insurance scheme) without government involvement. The fourth arrangement puts part of the burden of bank failures on banks themselves and, therefore, forces them to regulate, supervise, and examine themselves although this would require government assistance if the resolution cost was so high as to affect the entire system; thus, it could imply some form of implicit government guarantee. Table 2 shows that 21 arrangements are officially-administered, 9 privately-administered, and 11 jointly-administered. These are distributed as follows: all the 4 arrangements in Africa are officially-administered; Asia has 4 official, 1 private and 2 joint; Europe I, 5 joint and 7 each for official and private; Middle East, 1 private; and Western Hemisphere, 6 official, and 4 jointly-administered funds.

Membership of a system, whether voluntary or compulsory, depends on the legislation. From the survey, the level of development of the financial system does not seem to have any bearing on whether membership was compulsory or voluntary (see Table 3). There does not seem to be a direct correlation between the type of membership (whether compulsory or voluntary) and how the funds are managed. Table 7 compares the membership and management of the explicit arrangements: of the 21 officially-administered schemes, membership was compulsory for 14, while out of 9 privately-administered, membership was compulsory for 6. For the 11 jointly-administered arrangements, membership was compulsory for 6. It is often argued that membership should be compulsory so that risks would be spread throughout the banking system and to ensure that the banking system is not made up of adversely selected banks--sound uninsured banks and unsound insured banks. Under those voluntary systems where the premia are risk-based, some banks--if allowed to--may choose to withdraw when they discover that the reckless activities of other banks tend to increase premium assessments.1/

Table 7.Comparison of Membership, Sources of Funding, and Management in Explicit Deposit Insurance Schemes
CompulsoryVoluntaryBanksBanks and Central BankBanks and Govt.LoansOfficialPrivateJoint
Marshall IslandsXXXX
Europe I
Czech RepublicXXXX
Europe I
United KingdomXXXX
Middle East
Kuwait 1/X
Western Hemisphere
Chile 1/XXX
Western Hemisphere
Dominican RepublicXXX
El Salvador 1/X
Trinidad & TobagoXXXX
United StatesXXXX

Funding by government only

Sources: Questionnaire; Recent Economic Developments; and Staff Reports.Note: Totals may not match Table 2 as some information excludes E1 Salvador, Greece, and Slovak Republic; n.a. means either not applicable or not available.Last Update: May 1995.

Funding by government only

6. Funding arrangements

The insurer of depositors must have the resources to make good the guarantee promised. It is, therefore, necessary to have funds (reserves) or sources of funds as contingency against claims. Without such funds, the scheme could go bankrupt. The problem, however, is that unlike normal insurance where it is possible to actuarially determine the risk and therefore fix the premium accordingly, it is difficult to predict the probability of bank failures and therefore fix risk-based premia. Risk-based premium would tend to reduce moral hazard on the part of banks. Only the United States has a risk-based premium system, which began in 1993 and is assessed on the basis of capital ratios and other relevant information (see Appendix). There is a provision under the Hungarian system that allows the Fund to levy extra premia on individual banks if they pose higher insurance risk and in Argentina, the premium paid by banks may be increased based on risk indicators determined by the central bank.

In Italy, branches of foreign banks and foreign branches of Italian banks (if covered) pay higher premia. In other arrangements, a flat premium is assessed. When reserves are too low compared with claims, there may be a tendency to postpone the closure of insolvent banks (because the Fund otherwise would itself become insolvent), but such delays could eventually cost the Fund and/or government more. At the same time, a very high level of reserves could imply higher taxes if the government is the source of funding; on the other hand, if funding is by banks it could reduce their profitability.

Table 5 shows the various funding arrangements. Under a number of arrangements (Chile, Japan, Nigeria, the Philippines, Portugal, Taiwan Province of China, and Uganda), the government or central bank provides the initial capitalization for the fund and banks are levied premia based on their covered deposits, total deposit liabilities, total assets, or some specified liabilities. The size of the fund depends on the objectives, the lowest being for systems that guarantee only individual deposits up to a very low limit. There are two types of funding arrangements: funded or unfunded arrangements. Under funded schemes, banks pay premia or special assessments into an established fund, while in unfunded arrangements, a fund is not permanently maintained but the government or central bank reimburses depositors when claims are made or insured institutions are called upon to make contributions when claims are made. Under the unfunded arrangements in Italy, Luxembourg, the Netherlands, premia are assessed and called when claims are made on the institution.

Under some funding arrangements, such as in France, Italy, Nigeria, and the United Kingdom, in addition to the premia or periodic assessments, there are callable or supplementary funds in anticipation of claims. In some cases there are target levels for the Fund, such as US$2 billion or 5 percent of total deposits for Argentina, a minimum of £5 million and a maximum of £6 million for the United Kingdom, DKr 3 billion for Denmark and 1.25 percent of insured deposits for the United States. 1/ For a number of arrangements (e.g., the Czech Republic, India, Nigeria, Tanzania, the United Kingdom, and the United States), the legislation specifies a contingent liability in excess of the reserves to be made available in a loan basis in the event of depletion of the fund. Nine of the arrangements studied are unfunded, while thirty-four are funded. Banks are the main source of funding for thirty-one schemes.

Only a few systems (Canada, Japan, Mexico, Taiwan Province of China, and Turkey), base their premia on insured deposits, most others appear to base the premia on total deposits.

III. Conclusion

This paper has reviewed deposit guarantee arrangements in about a hundred countries. Most countries began to establish deposit protection schemes in the 1980s. Some of these, especially the explicit arrangements, were set up largely in response to emerging problems in the financial system. All industrialized countries, with the exception of Australia and New Zealand, have explicit deposit protection; while among the Asian NICs, only Taiwan has an explicit scheme. The techniques used by countries in achieving their objectives vary. The arrangements are not always mandatory and the characteristics vary by way of government involvement--they are government-administered, privately-administered or joint government/private depending sometimes on the level of state participation in the protection of depositors.

In a few cases, particularly in the Western Hemisphere, the deposit protection agency also performs the function of bank supervisor, while in a number of industrialized countries such as France, Germany, Japan, and the United Kingdom, deposit insurance is mainly for the purpose of protecting depositors and only complementary to regulation and supervision.

Funding arrangements also vary. In a number of cases, the insurance fund is capitalized by the government or central bank and annual premium is assessed and contributed to the fund, which in some cases have minimum and maximum target levels. In other cases, funding is assessed ex post depending on how much it is required to pay depositors or to salvage a failing bank.

New Zealand has adopted a novel arrangement under which deposit protection assurances have been rescinded in favor of disclosure requirements which make bank owners and depositors responsible for their actions.

Finally, looking into the future for deposit protection arrangements, The Baltic countries, Russia, and other countries of the former Soviet Union, Central and Eastern Europe are considering or have began introducing explicit arrangements, in the latter cases moving toward the EU system. There are also plans in several African and Caribbean countries to provide explicit deposit protection. Disclosure of information on the financial health of banks to the public could also increase to complement deposit protection.

APPENDIX Some Details of Country Arrangements

As discussed in the paper, formal deposit protection arrangements have become increasingly common and where they exist, they vary in design through the level of government involvement, coverage limits, and funding arrangements. They also depend on the structure of the banking system and the supervision arrangements. Where regulation and supervision are more prominent and there exist seemingly less costly avenues of ensuring the soundness and safety of financial system, deposit guarantee arrangements seem to play a secondary role. Most explicit schemes were established either in response to emerging crises or to prevent future crises in the financial systems and the forms they take tend to follow from the objectives. Following are some details for the various arrangements.1/

1. Africa

There are currently only four explicit deposit protection arrangements in Africa. The first was set up in Kenya in 1985 under the Banking Act of 1985 in response to four bank failures. The system is officially administered and membership is compulsory for all banks. Funding is through annual assessments between a minimum of K Sh 100,000 (US$2,100) and a maximum of 0.4 percent of deposit balances. Most deposits are covered up to a limit of K Sh 100,000. In Nigeria, under the Deposit Insurance Corporation Decree of 1988, an officially-administered and compulsory membership system is established, where all types of deposits (except those used as collateral for loans, foreign currency deposits, certificates of deposits, and interbank deposits) are covered at a limit of ₦50,000 (US$2,270) per depositor. The system is funded through banks’ annual assessment of 15/16 of one percent of deposits. In Tanzania, a Deposit Insurance Fund was established in 1993 under the Banking and Financial Institutions Act of 1991 for most types of deposits at a coverage limit of T Sh 250,000 (US$480). The Fund is supervised by a board chaired by the Governor of the Central Bank and initial capitalization was provided by the government. Foreign deposits and interbank deposits are not covered. An explicit system was set up in Uganda in early 1995 under the Financial Institutions Act. All deposits except foreign currency and interbank deposits are covered at a limit of U Sh 3 million (US$3,000). Membership is compulsory for all banks, including branches of foreign banks. Annual premium is 0.2 percent of deposits for banks and the government’s, an initial capitalization of U Sh 2 billion to the Fund, which is held and managed by the central bank.

In spite of the absence of explicit arrangements in most African countries, in both the BCEAO and BEAC member countries, there is evidence of implicit guarantees at various levels. 1/ In Senegal, the promise to pay depositors was honored, but the waiting period was long while in Cameroon, the promise was not honored. The strategy in both countries has been to takeover the nonperforming loans of the banks to keep them afloat rather than reimburse depositors. For this purpose, the Government of Cameroon set up the Société de Recouvre de Créances du Cameroon with assistance from the USAID while the Société Nationale de Recouvrement was set up in Senegal as part of a broad effort to ensure the safety and soundness of the financial systems of both countries. A similar arrangement exists in Ghana, where with the assistance of loans from the World Bank, the Nonperforming Assets Recovery Trust (NPART), was set up to manage the bad assets of the banks. In the case of a number of Rural banks (unit banks in rural areas), depositors were reimbursed at a limit of ¢100,000 (US$100) and the banks liquidated.

2. Asia

With only seven formal deposit guarantee arrangements, the situation in Asia is quite similar to that of Africa (although the financial systems are relatively more developed in Asia) and deposits are protected under various forms of implicit guarantees. Among the Asian NICs, only Taiwan is known to have an explicit deposit protection arrangement. The deposit insurance scheme in India was established in 1962 under the provisions of the Deposit Insurance and Credit Guarantee Corporation Act of 1961. A fund is managed by the Reserve Bank with contributions from banks at a rate of Re 0.04 per Re 100 per annum, payable in advance on a half-yearly basis (January and July). The Corporation may borrow from the Reserve Bank of India and the healthy level of the fund has been estimated at 0.50 percent of insured deposits. All types of deposits (except interbank deposits and state and foreign government deposits) are covered, including deposits in foreign currency. The maximum limit of coverage is Re 30,000 (approximately US$960) in a bank for all the accounts of the depositor in the same right and capacity. In the Philippines, the Deposit Insurance Corporation (PDIC), was set up in 1963 to reimburse depositors of failed banks and to assist distressed banks. The fund is administered jointly by the banking industry, central bank, and government representatives and membership is compulsory for all banks who pay premia based on total deposits. All deposits, except interbank deposits are covered at a limit of

100,000 (approximately US$3,700). Due to widespread failures, the central bank has borne most of the losses; the PDIC Act was amended in 1992 to double its paid-in capital from
1 billion to
2 billion and the premium increased from 1/12 of 1 percent to 1/5 of 1 percent of total deposit liabilities. The PDIC may borrow from the central bank or designated government financial institutions and banks.

Bangladesh has a deposit insurance fund set up under the Bank Deposit Insurance Ordinance of 1984 providing coverage for all deposits except interbank deposits and foreign currency deposits; membership is compulsory for all banks who pay semi-annually a uniform premium at a rate of 0.04 percent of deposits outstanding as of the last working day of the preceding half-year period. The premia are deposited at a Deposit Insurance Fund maintained by the central bank. The coverage limit is Tk 60,000 (US$1,500).

The Deposit Insurance Corporation of Japan was established in 1971 to protect depositors and maintain the stability of the banking system. The fund, managed jointly by the Bank of Japan (whose deputy governor is the managing director of the corporation) and industry representatives, was capitalized with equal contributions by banks, the Bank of Japan and the Ministry of Finance. Membership is compulsory and the annual premium is 0.012 percent of covered deposits. The Corporation has the authority to borrow up to US$4.5 billion from the Bank of Japan. Only demand and time deposits in local currency and with branches of Japanese banks in Japan are covered, to a limit of ¥10 million (US$100,260) per depositor. In the past, resolution of problems in the financial system had been through mergers of weaker banks with healthier ones and provision of emergency loans by groups of banks to weaker ones and until 1995 the Corporation had only in one instance extended a loan to a troubled institution. However, in August 1995 a number of banks and credit unions came under pressure as depositors rushed to withdraw money, leading to the collapse of one commercial bank and two credit unions and forcing the Bank of Japan to extend a loan to one bank. The Bank of Japan also earmarked ¥500 billion in low-interest loans to boost the funds at the Deposit Insurance Corporation.

In the Marshall Islands and Micronesia, where most commercial banks are branches of U.S. banks, the deposits of those branches are covered by the FDIC and therefore tied to the U.S. system. Under the Compact Agreement of Free Association with the United States, this insurance coverage was to be extended to other banks but has not been implemented.

The Central Deposit Insurance Corporation of Taiwan Province of China was established in 1985 under a Deposit Insurance Act. A fund was set up and capitalized by the Ministry of Finance (MoF) and the Central Bank of China (CBC). The fund is a public sector entity with board members appointed by the MoF and CBC. Membership is voluntary and institutions covered are banks (including domestic banks, local branches of foreign banks, and investment and trust companies), Credit Cooperative Associations, and Farmers and Fishermen’s Associations with credit departments. Premium is currently set at 0.015 percent of insured deposits. Deposits covered include demand, savings and time deposits, trust funds and other deposits approved by the MoF. The coverage limit is NT$1 million (US$38,500) per individual depositor.

In 1985, under a deposit protection scheme, a Fund for the Rehabilitation and Development of Financial Institutions was established in Thailand to rehabilitate distressed banks which faced problems caused by fraud and speculation on real estate and unsecured insider loans. Assistance was through loans, acquisition of nonperforming assets, and equity participation. The Fund is officially administered and funded through bank contributions and loans from the central bank.

There is no explicit deposit protection arrangement in Malaysia, but the Bank Negara has usually taken over failed commercial banks and reimbursed depositors in the past, thus providing an implicit guarantee. This guarantee, however, covers only commercial banks, while other failed financial institutions such as credit cooperatives, have been liquidated without any compensation for depositors.

In a revised arrangement for bank supervision in 1993, the Reserve Bank of New Zealand withdrew the implicit government guarantee of deposits in a shift in emphasis from supervisory rule to placing greater reliance on market disciplines as a means of promoting a sound and efficient banking system. The arrangement seeks to avoid the impression that the government had a role in “underwriting banks” or protecting depositors from bank failures. It involves a new disclosure regime aimed at reinforcing incentives for bank management to maintain prudent banking practices and to equip depositors to monitor the performance of their bank relative to other banks and thereby protect their own interests. 1/

3. Europe I

The European Union Directive of May 19942/ requires each member state to ensure that one or more deposit guarantee schemes are introduced on its territory. An EU-wide system of deposit protection is seen as an essential element of the single EU banking market, founded on the “European Passport” for banks and home country responsibility for the solvency of branches in other member states. Credit institutions that are not a member of a scheme are not permitted to take deposits. The minimum cover under the scheme must be ECU 20,000 per depositor. Interbank deposits and bonds issued by banks are not covered. Branches in other member states of banks licensed in the EU are covered by the deposit guarantee scheme effective in the home country. Branches can opt to join the system in the host country, in order to be able to offer their depositors the same cover as domestic banks. Conversely, branches from member states that have a more generous system than the host state, may not offer better cover than is available in the host state until December 1999. Credit institutions shall inform their depositors which deposit guarantee scheme is applicable to them and how it functions. This EU directive was to be incorporated by the member states into their national legislation no later then July 1, 1995. The information on the EU member states presented below reflects the situation before July 1, 1995. Most systems will have been brought into compliance with the directive at the time of issuance of this paper.

The deposit insurance system in Austria was established as an unfunded arrangement with compulsory membership to cover individual depositors up to a per depositor limit of S 200,000 (US$18,000).

In Belgium, two separate funds jointly administered by government and industry representatives, were set up in 1985 for commercial banks and savings institutions with an initial funding of BF 3 billion to provide for small and medium-size depositors for whom the consequences of a bank failure would be greater than for large depositors, and to prevent the financial system’s credibility and the public trust from being eroded. Membership is voluntary at an annual premium of 0.02 percent of specified liabilities and the coverage limit is BF 500,000 (US$12,500).

In July 1994 an officially-administered Deposit Insurance Fund was set up in the Czech Republic with compulsory membership for all banks and branches of foreign banks. Premium is set at 0.5 percent of total deposit liabilities per year and the Fund may also borrow from both the government and the central bank, in which case the premium will be doubled until the loans are repaid. Only deposits of individuals are covered, at 80 percent of total deposits of each depositor (including shares in joint accounts) but not exceeding Kč 100,000 (US$3,565).

All the Nordic countries have explicit deposit insurance arrangements. The system in Denmark is in the form of a private independent institution funded through banks’ contributions and most deposits (including a number of special deposit accounts) are covered at a limit of DKr 250,000 (US$41,100). The minimum size of the fund has been determined at DKr 3 billion. Contributions are set at 0.15 percent of total deposits until the minimum size is attained. Thereafter, assessments may be levied as needed within an annual maximum of 0.2 percent of deposits. Contributions may partly be in the form of guarantees but the Fund must hold at least 25 percent of its capital in cash. Institutions covered are commercial, savings, and cooperative local banks and branches of foreign banks.

In Finland, unfunded independent mutual schemes for savings and cooperative banks were set up in 1924 and 1931, respectively. A fund was set up in 1965 for commercial banks who manage and contribute between 0.01 percent and 0.05 percent of total assets annually. The arrangements were formalized in 1969 with compulsory membership. In addition to these, a Government Guarantee Fund was established in 1992. Under the current system, the level of protection is 100 percent.

In France, there is a privately-administered system largely resulting from the history of banking activity in that country. The system for banks was set up in 1980 by the Association of French Banks. It is not a fund or insurance, but a loss-sharing agreement among banks, that is, an ex post burden sharing. Under the system, banks may be called upon to underwrite the losses of a member; such contributions may not exceed F 100 million in a given year but can be two years retroactive as well as two years in advance, so that the potential contribution in a year could add up to F 500 million. The coverage extended to deposits is at a limit of F 400,000 (US$74,800) but coverage excludes interbank, foreign currency and excessively remunerated deposits. Membership is voluntary, but about 50 percent of banks are either publicly-owned or are mutual associations that insure each other, and so do not have earmarked funds for depositor protection. However, implicit depositor protection is guaranteed under Section 52 of the Banking Act of 1984, which allows the Governor of the Bank of France to call upon the major shareholders of a distressed bank to make contributions to rebuild its capital base. In addition, the governor may require industry contribution to protect deposits to ensure confidence in the banking system as well as promote Paris as a major financial center. Section 52 was applied in the case of the Al Saudi Bank in 1988, although in that case and in those of others that Section 52 was not applied, some depositors did lose some money. 1/ Under the French system this is considered a way of reducing moral hazard--the uncertainty as to how much depositors would lose if a bank fails should instill discipline in investor decisions.

In Germany, the system began in 1966 with commercial banks, originally to cover deposits up to a limit of DM 10,000, which was later doubled. In 1976, the system was modified to ensure that deposits of all members of the public were covered and to prevent unequal conditions of competition between the small and large banks. 2/ The present system provides protection for nonsecuritized liabilities to nonbank depositors up to a level of 30 percent of the liable capital (paid-up endowment capital and reserves) of the bank per depositor. There are three privately-administered funds for each of the three categories of banks. The public sector banks, mainly savings banks, are guaranteed in full by the municipalities in which they operate. The system consists of 12 regional protection funds which intervene independently in distressed member banks up to 15 percent of their total amount in the event of their inability to honor claims, or when their capital is threatened. The cooperative banks guarantee each other in mutual associations and have a guarantee fund to assist members. Thus, the public and cooperative bank systems are not explicitly aimed at protecting depositors but to assist member banks through preventive action, loans, and guarantees. In place of explicit protection, these banks have enhanced their disclosures to bank customers. The arrangement for commercial banks, on the other hand, is under the auspices of the Federal Association of Banks with the purpose of giving assistance, in the interest of depositors, in the event of imminent or actual financial difficulties of banks, thus implying explicit guarantee. The supervision function for all credit institutions in the country is carried out by a central agency, although the private system gives the association of banks the power to intervene and attempt to resolve bank failures.

A National Deposit Insurance Fund was established under an Act in Hungary in 1993. The system, based partly on the EU Directives on Deposit Protection, requires deposit taking financial institutions to become a member of the Fund before they begin the collection of deposits. The Fund is established by law as a legal entity (neither an economic association or a public institution), headed by a board consisting of the President of the central bank, and representatives from the Ministry of Finance, State Bank Supervision, Bankers’ Association, and the National Association of Savings Cooperatives. The Fund coordinates closely with the National Bank of Hungary and the State Banking Supervision in the task of protecting depositors. Member institutions contribute 0.5 percent of their subscribed capital upon joining and an annual premium of 0.2 percent of total deposits in four equal installments. The Act permits the Fund to levy premiums in excess of the 0.2 percent (up to a maximum of 0.3 percent) on individual banks if they pose higher insurance risk. The coverage limit is Ft 1 million (US$9,000) per client per financial institution for all deposits held by the client. The coverage includes foreign currency deposits and resident and nonresident depositors alike.

In Iceland, two separate funds were established in 1985 for savings banks and commercial banks. The Savings Banks Fund is privately-administered, while the Commercial Banks Fund is a public entity. Membership is compulsory and annual premium is set at 0.15 percent of total deposits. Coverage limits (for all types of accounts falling under the definition of “deposit”, including exchange-rate-linked accounts and foreign currency accounts) are, however, 80 percent for deposits with commercial banks and 67 percent for savings bank deposits.

In Italy, the 1936 Banking Law provided for implicit deposit insurance by way of a system of controls that aimed at minimizing the social costs of bank failures. The Bank of Italy was empowered with three legal procedures for resolving bank crisis: compulsory administration, compulsory administrative liquidation and assisted mergers. The Interbank Deposit Protection Fund was set up in 1987 to provide further protection for depositors following the failure of Banco Ambrosiano, in which creditors received 67 percent of claims. The purpose of the Fund is to pay depositors in case of bank failures and also to prevent failures. Membership is voluntary, the Fund is autonomous and adopts three forms of resolution: liquidation, mergers or financial assistance. On the other hand, it cannot borrow and does not perform a supervisory and regulatory function, although it does so indirectly through entry requirements. Similar to the French system, contribution to the Fund is ex post but is 1 percent of total deposits up to a limit of 4,000 billion lira. Callable contributions may be increased to handle claims on the fund up to an additional limit of 0.05 percent of total deposits. 1/ There is an element of coinsurance but it applies only to large deposits: the coverage limit is Lit 1 million but when it comes to reimbursement, the first Lit 200 million (US$122,700) is fully reimbursed and 80 percent of the next Lit 800 million is paid while any portion of deposits in excess of Lit 1 billion are not reimbursed. Foreign currency deposits are covered while interbank deposits are not. The amount of the Fund’s payment of a single deposit cannot exceed one third of the capital and reserves of the liquidated institution.

All deposits for individuals are covered at a limit of Lux F 500,000 (US$15,200) per deposit under a private unfunded system in Luxembourg, set up in 1989. It is a non-profit association and contributions (in proportion to the percentage of insured deposits to the total amount of insured deposits of all the members of the association), are made only in the event of a claim.

The system in the Netherlands was established in 1979 as an unfunded mutual scheme administered by the Netherlands Bank. It also has an advisory board with representatives from the central bank and major banks that make policy decisions. Membership is compulsory for all banks and credit institutions. Ex post premium is assessed on the basis of each members’ share of insured deposits at a maximum of 10 percent of core capital; in excess of the 10 percent, other institutions may be asked to take up the remainder or the central bank grants the member an interest free loan and in cases where repayment becomes a problem, it is waived. The system is solely to protect small depositors and the coverage limit is f. 40,000 (US$23,050); only deposits of private individuals, nonprofit organizations, and very small scale individually-owned enterprises are covered. The coverage limit is revised every three years on the basis of mean annual income. The system has been used three times to reimburse depositors and operates in two ways: either the courts grant a moratorium to the Netherlands Bank or the bank files for bankruptcy. The Netherlands Bank then assesses the claims and informs banks about their contribution. Any recoveries made after liquidation is refunded to banks on a pro rata basis.

The system in Norway was established in 1961, with separate funds for commercial banks and savings banks at 100 percent coverage and premium of 0.015 percent of total assets. However, both funds became insolvent in 1991 due to widespread failures following a sharp decline in asset prices and mounting credit losses in the banking system. 1/ The government established the Government Guarantee Fund in April 1992 to support banks directly through special issues of new equity capital, and indirectly through loans to the two guarantee funds. In addition, a Government Bank Investment Fund was set up in October 1992 to invest in bank shares and other instruments qualifying as core capital.

The system in Portugal was established under Law 298 of 1992 as a Deposit Guarantee Fund to provide coverage for demand and time deposits in domestic currency, as well as foreign currency deposits. Full coverage is provided up to a maximum amount determined by the central bank or the Ministry of Finance, and beyond that an element of coinsurance is applied. Initial funding was set by the Ministry of Finance on the basis of the previous year’s average monthly deposit balances for each participating bank while the Bank of Portugal’s contribution was equal to the total contribution of member institutions at the time the system was established. Subsequent contributions by banks is paid annually at a percentage of total deposits set by the Bank of Portugal.

In the Slovak Republic banks remain covered by government guarantee and there is a proposal to set up a Deposit Insurance Fund.

Spain has three separate funds for commercial banks, savings banks and credit cooperatives. Membership is voluntary and funding for the banks’ fund, set up in 1980, is 0.15 percent of deposits annually plus 50 percent equivalent of banks’ contribution by the Bank of Spain, and for the other funds, 0.10 percent of deposits plus 100 percent of the institutions’ contribution by the Bank of Spain. The funds may also borrow from the Bank of Spain, whose contribution may increase four-fold in the event of a crisis. The coverage includes demand and time and foreign currency deposits but excludes interbank deposits. Coverage limit is Ptas 1.5 million (US$11,400) per depositor.

Deposit guarantee in Turkey began in 1960 with the Bank Liquidation Fund (BLF), which provided 100 percent coverage to all depositors. It was funded through an initial contribution of 0.05 percent of commercial and savings bank deposits and ex post premium assessments. In 1983, the Savings Deposit Insurance Fund was set up under the Central Bank Act and took over the BLF. The fund is managed by the central bank and membership is compulsory for all domestic and foreign banks who pay an annual premium of 0.3 percent of insured deposits. Coverage was restricted to only small depositors at a limit TL 3 million (US$83), however, in April 1994, the government made a public statement providing 100 percent coverage for all household deposits (including foreign currency deposits).

Deposit insurance in the United Kingdom began with an implicit guarantee in 1973 under the “lifeboat” fund, following a near widespread bank distress. This arrangement took the form of burden-sharing among clearing banks on the basis their size of operations. Explicit protection began in 1982 as part of a broad banking system reform under the Banking Act of 1979. The Deposit Protection Board was established in 1982 initially to protect “widows and orphans,” i.e., small and unsophisticated depositors. Currently no distinction is made between corporate or personal accounts. The arrangement is not considered fundamental to ensuring the overall safety and soundness of the banking system; strong supervision is considered as the main protection against depositor loss. The coverage limit is £20,000 (US$30,800) but with an element of coinsurance to instil depositor discipline--the maximum amount paid to a depositor is 75 percent of covered deposits or £15,000. Coverage is provided for nonresident depositors, but not for CDs, interbank deposits, and foreign currency deposits. The Board is managed by representatives from the Bank of England (the Governor is the Chairman) and participating institutions who must contribute at least £10,000 a year (or higher but not exceeding £300,000 if the fund fell below a threshold of £3 million). The minimum and maximum size of the Fund are £5 million and £6 million, respectively. At end-year, if the Fund was in excess of the maximum limit, banks are reimbursed on a pro rata basis. The Board has the authority to borrow £10 million, but its power is limited since the central bank can decide on resolution procedures, i.e., whether to allow failure, intervention or provide support.

4. Europe II

There are currently no explicit deposit protection arrangements in the Baltics, Russia and other countries of the FSU, although all deposits in the savings banks are guaranteed by the government. 1/ However, most of the new banking legislation provide for deposit protection arrangements, although in all cases they are yet to be established. Estonia, is working on a deposit insurance fund to cover individual deposits up to a limit of EEK 20,000 and financed from banks’ reserve requirements. In Russia, banks contribute to a fund held by the central bank for the purposes of helping distressed banks, but nothing has been disbursed to date and in Tajikistan proposals have been put forward for a different deposit protection system under which each bank will be required to set up a special fund in its own balance sheet.

6. Middle East

In the Middle East, only Lebanon, with a long tradition of banking, has a deposit guarantee fund. The Etablissement et Caisse des Depots (ECD) guarantees all deposits up to a maximum of LL 5,000 (US$18). Draft laws are under discussion to recapitalize or permit the ECD to borrow from the central bank to meet the expected claims from insolvent banks. These laws will also cover the methods for resolving insolvent banks. In Kuwait, there is government guarantee under the constitution for all deposits at the expense of the government budget. Implicit guarantees exist in Iraq, Jordan, Oman, and United Arab Emirates.

5. Western Hemisphere

Deposit protection arrangements are widely dispersed in this region and do not seem to be based entirely on the development of the financial systems.

In Argentina, prior to 1979, implicit government guarantee was provided in the form of reimbursement if the central bank was the liquidator of a failed institution. An explicit deposit insurance scheme was introduced in 1979 to cover all demand, time, and foreign currency deposits up to US$3,000 per depositor. 1/ The 1991 Convertibility Law eliminated the explicit deposit protection and replaced it with improved supervision-cum-transparency which was considered a better alternative which would promote prudential behavior by bank managers and owners and depositors.

In April 1995, following banking problems after the Mexican crisis, the government reintroduced explicit deposit guarantees under a decree creating a deposit insurance system in Argentina as well as a trustee, Seguros de Deposito, S.A. (SEDESA) for a new Deposit Insurance Fund (DIF). SEDESA is established to manage (invest) the DIF and pay out depositors whenever there is a need. Its Board will include representatives of banks to provide peer group monitoring. The plan is for SEDESA to recommend to the central bank’s Superintendency of Banks (SIB), a graduated contribution structure depending on the relative quality of banks’ portfolios, advise the SIB on new applicants for a bank license and on unsound or irregular practices by existing banks, and deal with demands for payments of deposits (within 30 days) whenever a bank’s license has been revoked by the central bank.

The fund is constituted by obligatory contributions of all banks (with the exception of the Banco de la Provincia de Buenos Aires, which is subject to its own law) of 3 to 6 basis points of average deposits in domestic and foreign currencies per month (0.36 to 0.72 percent per year). The contribution may be increased from 3 basis points for banks based on risk indicators determined by the central bank. In case of need, the central bank can require (with 30 days’ notice) banks to advance up to one year of regular contributions. The DIF has a target amount of US$2 billion or 5 percent of total deposits, whichever is larger. When the target is reached, the central bank can reduce banks’ contributions. Coverage is US$10,000 for savings deposits and nonnegotiable time deposits from 30 to 90 days and US$20,000 for nonnegotiable maturities of over 90 days. The central bank may exclude from the coverage deposits of related parties and deposits with yields more than 2 percentage points above a specified reference rate. In addition, all deposits are subject to a basic central bank guarantee of US$3,000.

In Canada, the Canadian Deposit Insurance Corporation was set up in 1967 to insure deposits of federally chartered financial institutions and provincially chartered trust companies. Membership is compulsory and member institutions are assessed annual premia of 0.016 percent of insured deposits. The Corporation may borrow up to Can$6 billion from the Federal Government. Deposits covered include demand and time deposits (up to five years), registered retirement plan deposits, pension plan deposits, and deposits under home-ownership schemes at a coverage limit of Can$60,000 (US$42,800) per deposit. Coverage excludes interbank deposits and foreign currency deposits. The financial system in Canada faced problems similar to those of the United States: boom and bust of the real estate and energy sectors leading to widespread failures of trust and mortgage loan companies which depleted the reserves of the insurance funds. The government was forced to intervene at a cost of US$400 million to the tax payer and US$1.4 billion to the Bank of Canada.

The deposit guarantee system in Chile was set up in stages. It began in 1977 as an implicit interim government guarantee with funds provided by the Treasury to the Superintendency of Banks for the resolution of bank failures. Following further bank failures in late 1981, a complementary system was set up with central bank funding and a fee of 0.1 percent of average monthly insured deposits paid by depositors. 1/ A formal scheme was established in 1987 under the 1986 Banking Law. All deposits are covered with a coverage limit of 100 percent for demand deposits and approximately US$3,000 or 90 percent of the total, whichever is greater, for time deposits. The system is unfunded and the government reimburses depositors of failed banks through the Treasury or Superintendency of banks.

Under the Organic Charter of the financial system in Colombia, a deposit insurance fund, Financial Institutions Guarantee Fund (FOGAFIN), was established in 1985 to guarantee deposits of individuals and to resolve bank failures. FOGAFIN’s original insured deposits had a limit of Col$50 million per depositor, but was changed to a limit of 75 percent per deposit or Col$10 million (US$12,000), whichever is higher.

In the Dominican Republic, a system was set up in 1962 to provide coverage up to a maximum of US$8,000 for each depositor. The scheme is, however, restricted to savings and fixed term deposits of Housing Savings and Loan Associations, who are the sole contributors to the fund.

In Mexico, under the Banking Act, there is an explicit 100 percent guarantee for all deposits in the form of a government assurance that “efforts would be made to ensure that no depositor suffers any monetary loss in the event of a bank failure”. A fund, Fondo Bancario al Ahorro, was established at the central bank in November 1986 with regular monthly contributions from banks, equivalent to 0.3 percent of covered liabilities a year. The fund is managed by a board consisting of central bank and industry representatives that take decisions on resolution procedures. Coverage includes foreign deposits, while membership is compulsory and covers only commercial banks.

The formal deposit insurance in Peru was set up in 1993 under the new Law on Financial Institutions. Banks pay quarterly premia not exceeding 0.75 percent of total deposits a year into a fund managed by the central bank. The coverage limit is S/. 4,600 (or US$2,100 and indexed to inflation) per individual depositor for demand, time, savings, and foreign currency deposits. There is an additional restriction regarding the number of times an individual may be compensated for deposits lost in one year. If an individual has deposits at several financial institutions (more than two), and all of them failed during the same year, reimbursement is provided for deposits at only two institutions.

In Trinidad and Tobago, the Deposit Insurance Corporation was established in 1986 under the Non-Bank Financial Institutions Amendment Act to protect all types of local currency deposits at a coverage limit of TT$50,000 dollars (US$8,500). Membership is compulsory for all institutions licensed under the Banking and Financial Institutions Act. Annual premium is set at 0.2 percent of average deposit liabilities and the Fund may be supplemented with long-term loans from the central bank.

Deposit insurance in the United States has played a pioneering role since the first state deposit insurance began in New York in 1829. After the crash of the Stock Market in 1929, over 9,000 banks suspended operations, and depositors lost about US$1.3 billion. This led to the establishment of a national deposit insurance system in 1934 under the Banking Act of 1933, creating the Federal Deposit Insurance Corporation (FDIC), and a year later the Federal Savings and Loans Insurance Corporation (FSLIC) was created to provide federal insurance for deposits at savings and loans. The Federal Reserve Act of 1933 provided for two separate temporary plans for deposit insurance which was terminated by the Banking Act of 1935, and replaced with a modified version of the permanent plan. The premium was assessed on total domestic deposits at 1/12 of 1 percent (12 cents per US$100) per annum with a provision to borrow US$975 million from the Treasury. Since then, the coverage limit which was US$5,000 has been revised upwards five times and the premium moved to 1/15 of 1 percent in 1990.

Following the Savings and Loans (S&L) crises, a plan was advanced in early 1989 to recapitalize the FSLIC and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was enacted in August 1989 which enhanced the role of the FDIC. Under the Act, the FSLIC was abolished and the FDIC made the sole administrator of the federal deposit insurance system for S&Ls. The Act established two new government deposit insurance funds under the administration of the FDIC--the Savings Association Insurance Fund (SAIF) replaced the FSLIC and the Bank Insurance Fund (BIF) replaced the Permanent Insurance Fund (PIF). The Federal Home Loan Bank Board was abolished and replaced with the Office of Thrift Supervision (OTS) and the Federal Housing Finance Board (FHFB) as regulator and supervisor of the 12 district Federal Home Loan banks. Both the BIF and the SAIF were to maintain reserves equal to 1.25 percent of insured deposits up to 1.5 percent if necessary.

Under the current system, membership is compulsory for federally chartered depository institutions as well as state banks that are members of the Federal Reserve System. Membership varies by state for other state-chartered banks and thrifts. There is a basic coverage limit of US$100,000 per depositor. However, deposits maintained in different categories of legal ownership are separately insured. Also under the Federal Deposit Insurance Act, there is the “pass through” deposit insurance in which deposit insurance passes through the principal account of each individual beneficiary of a trust fund, pension and Individual Retirement Account (IRA)/Keogh Plan retirement account. Each beneficiary’s interest is separately insured up to US$100,000 in addition to any other insured accounts maintained by the individual in the same bank. Coverage includes demand and savings deposits, CDs, retirement accounts, deposits in foreign currency and interbank deposits. In the case of foreign currency deposits, reimbursement is made in domestic currency at the exchange rates in force at a specified time.

Members are assessed annual premium and since 1993, the FDIC has adopted a risk-based system that charges higher rates to those institutions that pose greater risks to the Fund. To arrive at a risk-based assessment for a particular institution, the FDIC places each institution in one of nine risk categories using a two-step process based first on capital ratios and then on other relevant information. In 1994, thrifts were assessed an average rate of 24.8 cents per US$100 of domestic deposits compared with an average rate of 24.3 cents per US$100 of domestic deposits for banks. The FDIC may also borrow up to US$30 billion from the U.S. Treasury.

The Deposit Guarantee and Bank Protection Fund (FOGADE) of Venezuela was established in 1985 to provide deposit insurance for banks and formal credit institutions. Only domestic currency deposits are covered, at a limit of Bs 1 million per depositor. Membership is compulsory and members contribute a premium of 0.5 percent of total deposits recorded in the previous half-year, in two half-yearly installments. A separate agency BANAP provides guarantee for deposits held at savings and loans associations. The Emergency Law of March 8, 1994 raised the maximum deposit guarantee from Bs 1 million to Bs 4 million and implicitly guaranteed interbank deposits. However, during the conservatorship of eight institutions, the authorities only permitted the return of up to Bs 100,000.

Belize, Bolivia, Brazil, Jamaica, Mexico, and Uruguay have implicit guarantees. In Brazil, the central bank fully reimbursed demand depositors during the liquidation of five banks in 1985 and in line with the constitution, there are plans to set up an industry-administered and funded scheme to guarantee demand deposits, time deposits, CDs, and bills.


The author would like to thank Carl-Johan Lindgren, Gillian Garcia, Jan Willem van der Vossen, and Claudia Dziobek for their comments and suggestions, and Anil Bhatia for excellent research assistance.

Earlier work include McCarthy (1980), Talley and Mas (1990), and the U.S. General Accounting Office (GAO) (1991).

The results are summarized in Table 4.

The country groupings follow those of area departments in the Fund.

A few implicit arrangements are also covered.

For the nature and major differences between implicit and explicit arrangements, see Talley and Mas (1990), p. 8.

In the U.S. foreign currency deposits are covered, but reimbursement is in U.S. dollars.

The EU Directive of May 1994 requires that branches be covered by the “home country” arrangement (see p. 31).

Under the U.S. system, there is a basic coverage limit of US$100,000 per depositor. However, deposits maintained in different categories of legal ownership and retirement funds are separately insured. The EU Directive of May 1994 also specifies a per depositor coverage so the arrangements in France, Italy, and Luxembourg are likely to change.

For instance, in Estonia, some private banks have planned to opt out of the proposed Government-administered system and establish their own arrangement, out of fear of risk posed by some weak banks.

In the case of the United Kingdom, further contributions may be levied at any time to give effect to an order by the Treasury approved by both Houses of Parliament.

This is compiled from the 1992 Questionnaire on Bank Supervision and Deposit Insurance, Recent Economic Developments, Staff Reports, Advisory Reports, and other sources such as Central Bank quarterly and annual reports.

BCEAO member countries are Benin, Burkina Faso, Côte d’Ivoire, Mali, Niger, Senegal, and Togo while Cameroon, CAR, Chad, Congo, Equatorial Guinea, and Gabon make up the BEAC.

Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on Deposit Guarantee Schemes; Official Journal 1994, L 135/5.

Although the deposit protection arrangement does not cover foreign currencies, these were fully compensated.

This was partly in response to the failure of the Bankhaus Herstatt in 1974.

For Italian branches of foreign banks, and foreign branches of Italian member banks operating in countries where there is no deposit protection scheme, the contribution base is twice the amount of total deposits.

The problems in the banking sector culminated in 1991, when the Government was forced to engage in a major rescue operation of two of Norway’s biggest banks. The Government took over Norway’s second biggest bank, Kreditkassen, and became the major shareholder of the second biggest bank, Den Norske Bank.

In some republics there have been moves to either remove this guarantee or extend it to other banks.

In 1980, as part of the government’s emergency measures to contain a banking crisis, the maximum size of fully insured deposits was increased by a multiple of 100 retroactively to November 1979.

By 1983, 11 commercial banks (including the largest private banks) and five finance companies had been liquidated or intervened by the government. The bailout of banks between 1981-88 cost an estimated US$6 billion or 26.2 percent of GDP.

Other Resources Citing This Publication