Deposit protection – savers need to know coverage limits
Until the latest statements suggesting unlimited guarantees, legal coverage was highest in Norway, France, Italy and Mexico. In the US the amount covered has been raised temporarily to 250,000 from 100,000 US dollars per account. The following graphs show coverage in early 2008 and the position as of 8 October 2008, based on government statements:
Source: Financial Market Trends No. 94 July 2008
For a savings insurance system to be effective in preventing bank runs in times of crisis, coverage must be set at adequate levels. Savers need to know the limits of the coverage. But consumer surveys have shown that knowledge of existing schemes is poor. A recent OECD study compared the extent of coverage as of June 2008 in 33 countries (see Further reading below).
Critics of deposit insurance schemes suggest they encourage excessive risk-taking by banks as the institutions are protected by a public safety net if things go wrong. To minimise this “moral hazard” it is important to promote good governance by banks and ensure a sound supervisory framework to deal with excessive risk taking.
Financial safety nets consist of three interrelated elements: prudential regulation and supervision, a lender of last resort and deposit insurance. If a country has developed mechanisms in only one or two of these three areas, it is still likely to face difficulties in preventing or resolving serious problems in its banking system.
* “Unlimited ?” is an interpretation of the implication of recent announcements or policy statements for effective coverage limits and that the data shown may not be identical to existing legal limits. As such the data may not be strictly comparable across countries.
Further reading: