Are There Differences Between Deposit Protection and a DGS?

Bank deposit protection is provided to eligible account holders by licensed credit institutions via a DGS. However, prior to serious deficiencies in the internal financial organization of a credit institution comes to light, one must address the organization of the banking sector, financial architecture and its institutional risk management. Credit institutions take money from savers and lend these funds out to borrowers. They repeat this process over and over again. To substantiate, strengthen and magnify the process of loan provision, financial institutions avail systems like fractional reserve and securitization furthered by the opportunities the shadow banking sector provides them with.

The stability of the banking must be maintained. This is mainly done by restrictions on the free entry to the market and the regulation of banking transactions. Next to the financial challenges credit institutions face, there is also an important play for sectorial abuse and conduct risk. Bank activities cross national boundaries and therefore involve more than one nations banking, consumer protection, criminal and tax laws. One critical confluence of objectives is always highlighted. It is that consumer freedoms and unrestricted rights to choose suppliers should be subject to minimal regulation while some safeguards are in place.

Financial institutions in distress may disrupt society. Retail banks that provide credit and merchant banks that allow business to finance their activities restrict their lending facilities in times of crisis. The distinction between an institutional and systemic crisis relates to the impact to society and therefore addresses the public interest. Whilst sorting out the challenges of financial and credit institutions in distress, regulars impose a statutory administration on the bank. When it becomes clear that the bank is failing or likely to fail and no solution is present at short notice, the local deposit guarantee scheme (DGS) is activated to provide deposit protection and reimburse account balances up to the insured amounts.

Deposit protection thus allows to reimburse eligible account holders via a DGS. Depending on the local customs and economic forecasts, the conditions for repayment are defined. Although the fundamentals are similar, the actual implementation of a deposit guarantee scheme may vary from country to country. Since a DGS exclusively covers eligible account balances and clearly set a maximum on coverage, creditor may need additional safeguards. More information about the processes for fund recovery, and for creditors with account balances exceeding the insured limits, is available here.