How Deposit Insurance Works

What is a Deposit Insurance System?

Generally, it is a mechanism that provides protection to depositors of commercial banks and other such deposit taking institutions upon the failure of these institutions.

Why establish a Deposit Insurance System?

A country may establish a deposit insurance system for a number of reasons some of which include:-

  • Provide protection for small unsophisticated depositors
  • Enhance confidence and stability in the financial system
  • Encourage savings and foster economic development
  • Promote competition between small new banks and more established larger banks

There are several options available to establishing a deposit insurance system:-

  • Narrow or Broad Mandate
  • Voluntary or Compulsory Membership
  • Limited or Full Coverage of deposits held
  • Coverage of Local Currency deposits only, or both Local and Foreign Currency deposits
  • Member contributions can be a fixed percentage of deposits held or vary according to the risk of failure for each member

Deposit Insurance systems across the globe incorporate some combination of the above options in their design and execution.

Funding can be extracted from different sources including:-

  • Privately supervised and funded
  • Publicly supervised and funded or
  • Combination of Private and Public

In addition to the foregoing, deposit insurance systems can be funded on either an ex ante or ex post basis

Profile of the Deposit Insurance System in Trinidad and Tobago

The objective is to provide protection for small, unsophisticated depositors.

The features are:-

  • Mandate (Paybox Plus – A Mandate in which the Deposit Insurer has additional responsibilities, such as certain Resolution functions (e.g. financial support).
  • Membership is Compulsory
  • Limited Coverage of deposits held
  • Combination of Private and Public Funding
  • Coverage of Local Currency deposits only
  • Member contributions are a fixed percentage of deposits held

 

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