What Are the Critical Differences Between Independent Deposit Guarantee Schemes?

Deposit Guarantee Schemes are focussed towards a local market. Within an internal, common or single market where borders fade away and borderless trade happens, uniformity of rules is recommended. Harmonization is prevalent, for example, in the European Economic Area (EEA) and the different states of the USA. However, local customs and national laws always determine specific needs to protect the (local) public interest. Therefore, differences exist and gaps and overlap create both opportunities and threats. Well-prepared creditors can design and structure their organization to meet their objectives.

The main differences between independent Deposit Guarantee Schemes (DGS) are location based. These include but are not limited to the coverage levels and claim eligibility, the type and organization of the fund (e.g. statutory – mandatory – and voluntary deposit protection), the funding of the scheme, the moment of activation, and the repayment procedures that also include the payout restrictions.

Public interest is a local determinant. Low income countries and benchmarks for savings by local consumers have different needs than their equivalent in the steadier first world. Deposit insurance is based on these factors where currency restrictions and advanced claim ineligibility may occur. In general, deposit insurance should not provide for unfair advantages and internal hedging. This means that creditors who can protect themselves from financial shocks should not be protected from DGS coverage.

Bank funding relies for a large part on bank deposits. In jurisdictions where account deposits contain high balances the business model of local banks is based on these deposits, furthered by advanced leverage techniques. Regulators therefore provide a framework that includes a mandatory statutory DGS fund for every licensed credit institution in the country, and a voluntary fund that insures the account deposit above the statutory level. Criticism exist though on this structure because it may allow banks and their customer to loosen their risk appetite because account balances are insured after all.

One of the advantages of a pre-funded DGS is that repayment of insured account balances can happen fast. Most schemes therefore require its members to pay contribution and premiums. The contribution can be in the form of an annual payment for the participation in the scheme. Premiums are based on the account balance and number of deposits, complemented by a risk-based component.

Some schemes are activated when a financial institution is unable to repay its creditors on demand. Others require regulators to determine that the institution is failing or likely to fail while there is no prospect that this situation chances for the better at short notice. Once the scheme is activated, creditors are either informed about the procedures to receive their compensation or must retain a pro-active attitude to file their claim form and supporting evidence. Verification of eligibility is always necessary and creditors who fail to provide claim evidence may see their claim rejected. Objection against such claim rejections or resubmission of a claim may then be needed.