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DEPOSIT PROTECTION
BOARD
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COVERAGE OF DEPOSIT INSURANCE
Presented at the IADI Africa Regional
Committee Annual Conference (ARC) on The
Benefits of Deposit Insurance in Africa.
DAR-ES-SALAM,TANZANIA :29 – 31 JULY 2010
BY: J M CHIKURA
CHIEF EXECUTIVE OFFICER
DEPOSIT PROTECTION BOARD ZIMBABWE
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Outline
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Introduction
Scope of Coverage
Types of Coverage
Setting the Coverage Limit/Level
Adjustment of Coverage Limits
Extent of Coverage
Concluding Remarks
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Introduction
• Deposit insurance coverage (DIC) is one of the key issues
in designing deposit insurance systems.
• Coverage issue covers scope and level. The issues are which
classes of depository institutions should join the scheme,
which financial instruments to cover and to what extent to
cover them?
• Core Principle (see core principle 9) - Policy makers should
define clearly in law, prudential regulations or by laws what
an insurable deposit is. The level of coverage should be
limited but credible. It should cover adequately the large
majority of depositors to meet the public policy objectives of
the system.
• The level/limit determines the potential liabilities of the DIS
and also influences the extent to which depositor’s confidence
in the banking system can be promoted by the scheme.
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Scope of Coverage
• Scope of coverage need to match the public policy
objectives of the DIS.
• Insure all financial institutions? Deposit taking
institutions are the prime targets of a DIS
• Cover all types of retail deposits.
• Insure foreign currency deposits if material i.e.
Hong Kong, Indonesia and Philippines are some
examples of DIS which insure both local and
foreign currency deposits
• Decision is complex & depends on the country’s
particular circumstances i.e. the total value of the
retail foreign currency deposits
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Determination of Insurable Deposits
Basic considerations include:
• the relative importance of different types of
deposits in the banking sector,
• ease of determining ownership of the
deposits,
• nature and purpose of the deposits
• Simplicity is key as exclusions can slow down
process of payment
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Most deposit insurers exclude the
following instruments from coverage:
•Interbank deposits,
•Government deposits
•Deposits held by bank directors and officers,
•Bearer instruments,
•Foreign currency deposits
•High interest rates typically paid by troubled banks
Both eligible and non eligible deposits for DIS
coverage should be clearly defined by law or private
contract so that depositors know with certainty.
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Types of Coverage Level/Limit
• Limited/partial coverage
• Full coverage
• Blanket coverage
Which option to pursue is mainly
determined by the public policy objective
emphasis.
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Limited/ Partial coverage
• Protects depositors only up to a certain amount and/or a
given proportion of account balance.
• Practiced where main public policy objective is to protect
depositors, especially the small & unsophisticated ones.
• The idea is not to interfere with the market discipline
• Limited DI coverage for some African DIS ;
• Nigeria : Banks (N200 000-US$1 709 Micro Finance:N100
000): Kenya(SH100 000-US$1 330): Zimbabwe (US$150)
:Tanzania(SH1 500 000 - US$850) .
• DI coverage in Africa the lowest compared to Europe , Asia
and the US.
• Current coverage range: Euro zone , 50 000 to 100 000 Euros
whilst coverage in Asia ranges from US$5 300 in the
Philippines to US$86 000 in Japan (Walker:2007).
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Advantages of Limited Coverage
• gives full protection to small depositors.
• gives the banking system at least some
protection against contagious bank runs.
• preserves some degree of market
discipline by exposing large depositors to
potential loss
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Disadvantage of Limited Coverage
• Might not offer the banking system a large measure of
protection against bank runs because large depositors are
also believed to have the capability to precipitate a run when
a bank is perceived to be in financial difficulty.
• Therefore the objective of contributing to the stability of the
financial system may suffer.
• The Northern Rock episode is a reminder that DIS with low
levels of coverage are not effective in preventing bank runs.
The Financial Services Compensation scheme had a limit of
35000 pounds when Northern Rock suffered a bank run in
2007.
• Zimbabwe also experienced bank runs between 2003 and
2006 despite the existence of a limited cover deposit
insurance scheme.
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Full coverage
• Protects all depositors , 100% of account
balances.
• This is often adopted if public policy
objective emphasizes the maintenance of
banking stability.
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Advantage of full coverage
•Full protection is preferred from a stability point
of view, as it reduces the motivation for a run on a
bank.
Disadvantage of full coverage
•Full protection erodes market discipline and
increases the problem of moral hazard.
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Blanket coverage/guarantee
• Offers full protection to both bank depositors
and creditors.
• Usually applied during banking systemic
crisis that threatens the payment system.
• Transition to limited /partial coverage
should commence as soon as possible.
• Blanket guarantees for a temporary period
is often advocated but with government
funding.
• This approach has been used in Indonesia,
Jamaica, Japan, Malaysia and Thailand.
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Advantages of blanket coverage
• In a banking crisis, blanket coverage may
strengthen depositors’ confidence as it
covers all depositors and creditors fully
thereby preventing bank runs and capital
flight.
• Blanket guarantee also gives authorities
time to implement bank resolution
strategies.
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Disadvantages of blanket coverage
•Blanket guarantees are a strain on the
fiscus as they involve huge funding
requirements.
• Full protection erodes market discipline
and increases the problem of moral hazard
if the blanket guarantee is retained for too
long.
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Setting the Coverage Level/Limit
• Majority of schemes are explicit limited deposit
insurance schemes.
• It is in fact regarded as the best practice.
• The question is how do we determine an
appropriate level of coverage for a
limited/partial coverage?
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Key Considerations
Depositor Profile
• The coverage limit can be set through an examination of
data on the number of deposit accounts and their size
distribution.
• This provides an objective basis for determining the
proportion of accounts and total deposits that will be
covered.
• The selected coverage level should protect the majority of
depositors, at least 80-90% of depositors should be covered
in full.
• Using this approach alone has however been criticized as it
does not take account of the macroeconomic condition of the
country within which the banking system operates.
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GDP
• Another means of assessing the adequacy of coverage is
to use a uniform measure such as GDP per capita.
• Coverage should be set in the region of one to two times
per capita GDP (Garcia:2000).
• However this approach may fail to produce the desired
result due to the following reasons;
• Income distribution is not the same in different
countries,
• what is considered a “small depositor” depends on the
particular situation of a country and may not be
captured by a single parameter such as the level of GDP.
• Need for striking a balance between discouraging
destabilising bank runs by small depositors, while
maintaining market discipline from large depositors
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Funding
• The coverage level can also be set after taking
into account the size of the DI fund.
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Other Considerations in Setting Coverage
Limit
•Economy
Country ‘s economic and financial
environment/development.
•Coverage of other DIS
It is also imperative to take into account coverage
limits in other countries with similar
development, phase of financial industry or
culture .
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•Adjustment of Coverage Limits
•Need for continuous review of coverage limit
from time to time
•Should inflationary changes be tracked?
• Some countries do index to inflation
•Need for coverage number to remain clear in the
minds of depositors
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Reasons for Adjusting Cover
•To maintain a credible deposit insurance cover
in response to inflationary pressures.
•To transition from a blanket coverage regime
to a limited coverage one.
•Coverage can also be adjusted in response to
the growth of real income.
Adjustments should not occur too often as this might
end up confusing the public ,at the same time
adjustments should not be too infrequent such that the
DI fails to meet its public policy objectives.
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Power for adjusting coverage limit vests
with either;
•External governmental bodies- Legislature,
Minister of Finance, Central Bank, eg USA, The
Philippines , Taiwan and Canada or;
•The Governing Boards of DI Agencies have such
powers as in Zimbabwe, Malaysia and Nigeria.
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Extent of Coverage
• Coverage level applied on a per depositor
per bank basis
• Joint account holders need to appoint a
primary depositor
• Netting off deposits against loans is done
but only those loans in default
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Concluding Remarks
• Disclosure of coverage limit and scope as well as other
benefits and limitations under the DIS must be
effectively communicated to depositors and all
stakeholders in order to build public confidence in the
DIS.
• Limits and coverage must be adequate.
• During a systemic crisis public confidence can be
maintained by;
-Increasing the coverage limit,
-Expanding the range of products covered; and
-Implementing systemic stabilization measures eg,
blanket guarantees.
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Concluding Remarks (cont)
•DIS should not use government guarantee as a
device to attract deposits from other jurisdictions.
•IADI guidance through the “core principles”
enable policy makers to decide on DI coverage that
best suits their peculiar economic and financial
environment.
Thank You !
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