Deposit Insurance
Deposit insurance is a guarantee scheme that protects depositors by reimbursing their funds up to a specified limit if a bank fails.
Meaning in Practice
Deposit insurance schemes are typically funded by contributions from banks and backed by public authorities. They cover eligible deposits up to a legally defined threshold. The system aims to maintain depositor confidence and prevent bank runs.
Why It Matters
By protecting retail depositors, deposit insurance strengthens trust in the banking system. It reduces the likelihood of panic withdrawals and supports financial stability. It is a key component of modern banking safety nets.
Market Impact
Strong deposit insurance frameworks reduce systemic risk premiums and support funding stability. Markets perceive insured deposits as safer, lowering the probability of sudden liquidity crises. Confidence effects can stabilize bank funding conditions.
Example
If a bank fails, retail customers are reimbursed up to the statutory coverage limit by the national deposit guarantee scheme. This ensures access to savings even during bank insolvency.