Understanding deposit insurance by gcneophil9



Deposit insurance is the term used for the statutory and voluntary measures taken to protect the
deposits of bank customers in the event of insolvency.

Like any investment of funds deposits bear counterparty risk, ie, the risk that the bank may not
repay the deposit. The instruments of deposit insurance may reduce this risk, but not
completely. The risk exposure of a guarantee of deposits is reduced to the level of default risk of
the guarantor.

It is intended to compensate customers in case of failure of their bank or financial institution to
dispense the funds. It includes the deposit guarantee, known as cash guarantee, warranty of
title, (guaranteed securities), guarantee of bonds (security guarantees).

Measures taken to guarantee security pertain to capital requirements, mutual responsibility
within banking groups, statutory deposit insurance, as well as voluntary deposit by the deposit
insurance fund.

The elementary protection of customers' deposits involves preventing the insolvency of the
bank. These are implemented through a number of provisions of the Banking Act, in particular
the capital requirements order. These rules will ensure that in case of problems sufficient bank
assets exist to pay the deposits of customers.

In some jurisdictions life insurance is guaranteed by the guarantee fund and health insurance.
The guaranteed amount is set at a predetermined maximum per insurer.

Those receiving invalidity pension or disability benefits (and beneficiaries of a contract following
a death) are entitled to a given amount. As regards guarantee insurance in general there are
many restrictions and the law sets a comprehensive multi-year intervention fund to limit

Banks are often part of formal (ie legally binding) or informal (ie voluntary) mutual liability
schemes. Legally binding liability rules often exist between parent and subsidiary companies.
Such a group of savings banks or cooperative banks are referred to as backup formations. Not
only deposits are protected but also the stock of the institutions, to such an extent that debt by
the cooperative banks and savings banks is fully secured.

The history of banking is closely connected with the history of banking crises, and thus the loss
of investors' money. Protection promised to the investor, is largely perceived to be reflected in
the choice of a bank with a long track record and good reputation.

In many countries, banks offer additional backups, in Europe there are numerous deposit
insurance funds of the respective banking associations, which protect more than the statutory
requirements, and the deposits of customers. The voluntary deposit insurance takes into
account the base rate of the statutory deposit.

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