Deposit Guarantee Scheme
A deposit guarantee scheme is a system that protects depositors by insuring their deposits up to a specified limit.
Meaning in Practice
In practice, banks contribute to a fund that compensates depositors if an institution fails. Coverage limits are defined by law and typically apply per depositor per bank. The scheme aims to maintain confidence and prevent bank runs.
Why It Matters
Deposit guarantee schemes protect households and small businesses from losses. They enhance trust in the banking system and reduce panic-driven withdrawals. This mechanism supports overall financial stability.
Market Impact
Strong deposit protection frameworks reduce the likelihood of bank runs. They can lower funding volatility during crises. Weak or unclear guarantees may increase systemic stress in turbulent periods.
Example
If a bank becomes insolvent, eligible depositors are reimbursed up to the statutory coverage limit through the national deposit guarantee scheme.