Is There Global Uniformity of a Bank Deposit Guarantee Scheme?

The financial system is of great importance to a local economy. Systemic challenges may be caused by financial institutions that are considered too big to fail. This is one of the main reasons that regulators try to ensure a stable financial sector that stimulates public confidence. A wide range of legal and financial conditions and measures are implemented to achieve these regulatory objectives. Deposit guarantee schemes are part of this framework that help to maintain stability of the financial system by guaranteeing bank account deposits held by eligible creditors.

Most deposit guarantee schemes provide some uniformity but are not harmonized. This distinction is derived from the local objectives for bank deposit protection. A complex mix of elements determines the exposure to a local economy and its public interest. As a result, differences in countries also let deposit guarantee schemes differ in scope and application. This is concretized in for example the Bahamas where only local currency accounts are protected by domestic Deposit Insurance Fund. Other distinctions exist as well while harmonization is for example implemented in the European Economic Area where EU member states all guarantee the same creditors and amounts.

Global uniformity of deposit guarantee schemes does not serve the purpose of domestic financial stability but merely considers the financial system from an international perspective. It is alleged that deposit insurance is interconnected with the real economy and thus protects retail deposits. Local regulator and lawmakers therefore design a deposit guarantee scheme to their own standards. Purchasing power parity and other economic theories contribute to these frameworks where they provide valuable insights into the needs of society.

For international bank account holders, differences in claim eligibility under a local deposit guarantee scheme provides opportunities for arbitrage but may also trigger indistinctness. Systemic crises, akin the recent global financial crisis, reveal the risk of spill over effects and may justify bank account opening for financially strong people in different countries with different risk profiles and legal systems. Within this playing field, creditors who seek overall protection by deposit insurance must consider the pro’s and con’s of these different framework. This is furthered by the lack of global uniformity of bank deposit guarantee schemes and the expensive experience creditors experience when deposits are not eligible and DGS claims get rejected.