Why Do International DGS Schemes Differ From Each Other?

The main objective of deposit insurance is to ensure public spending while maintaining confidence in the financial system. This objective is connected with local standards. Since purchasing power parity differs per country, the needs of a domestic environment for deposit insurance are unique. Overlap and harmonization does exist but this mainly applies to market economies with similar levels of political and economic stability.

Sovereign countries with different political, economic, and geographic circumstances warrant different DGS schemes. Economic and social objectives of the local population prevail. The local tax payer should not be indirectly paying for costly rescue missions of distressed financial institutions and rogue traders via tax increases. Therefore, DGS schemes seek a healthy balance between the protection of the local financial system by supporting liquidity to eligible creditors of the bank. The general consensus is that DGS repayments are used to support day to day activities and that these have an impact on the real economy.

Alongside the earlier mentioned local standards, sovereignty is an important part of local rulemaking. Independent states draft their own legal framework. This even applies to internal markets such as the European Union where parliament issues a directive for implementation into local laws of the member states. Member states must secure the end goal of the directive but have relative freedom to decide on the internal procedures and organization. The result is that even within the member states of the European Union differences in Deposit Guarantee Schemes exist.

The main differences that exist between DGS schemes relate to claim eligibility, maximum coverage levels, currency protection and claim submission procedures. The overall objective to provide protection for insured account balances when the bank is (provisionally) shut down. An indirect result is that public spending is stimulated and cross-sectoral spill over effects are mitigated.