How does deposit insurance create easy credit and for whom
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This chapter turns to the liability side of the bank’s balance sheet and discusses the deposit contract, deposit insurance, and shadow banking. We begin with a discussion of the economics of the demand deposit contract, and illustrate the economics with a numerical example. Then we discuss liability management, followed by deposit insurance as a way to reduce the likelihood of runs on banks. A numerical example is used to illustrate the key concepts. How deposit insurance should be priced using an option pricing approach is discussed next. Since deposit insurance can cause moral hazard, we discuss the empirical evidence on moral hazard and the S&L crisis in the 1980s as an illustration of how this moral hazard can lead to systemic problems. The chapter closes with a discussion of “shadow banking” and its relationship to traditional commercial banking. Show
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On This PageOn This Page Jump to Menu List On This PagePrev Next Jer123/Shutterstock 4 min read Published July 12, 2022 CheckmarkExpert verified Bankrate logoHow is this page expert verified? At Bankrate, we take the accuracy of our content seriously. “Expert verified” means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. About our Review BoardWritten by Matthew Goldberg Written by Matthew GoldbergArrow RightConsumer banking reporter Matthew Goldberg is a consumer banking reporter at Bankrate. Matthew has been in financial services for more than a decade, in banking and insurance. Matthew Goldberg Edited by Karen Bennett Edited by Karen BennettArrow RightConsumer banking reporter Karen Bennett is a consumer banking reporter at Bankrate. She uses her finance writing background to help readers learn more about savings and checking accounts, CDs, and other financial matters. Karen Bennett Reviewed by Robert R. Johnson Reviewed by Robert R. JohnsonArrow RightProfessor of finance, Creighton University Robert R. Johnson, Ph.D., CFA, CAIA, is a professor of finance at Creighton University and chairman and CEO of Economic Index Associates, LLC. Deposit insurance guarantees the money in your bank up to $75,000 per bank per person. Find out more about Deposit Insurance Scheme and how your money is protected. Key takeaways
What happens if a bank failsInternational experience has shown that banks can fail. Depositors can lose their savings even in reputable and well-supervised jurisdictions. While our banking system remains sound, things can go wrong in today's complex and globalised environment. In a bank failure, ordinary depositors may suffer the loss of their core savings. These are the funds they need to get on with their lives — money for groceries, school fees, utilities, phone bills, etc. before the next pay cheque comes in. Deposit insuranceThe Deposit Insurance Scheme provides a basic level of protection to small depositors. The Singapore Deposit Insurance Corporation (SDIC) administers the scheme in Singapore. Currently, the Deposit Insurance Scheme protects non-bank depositors (individuals, charities, sole proprietorships, partnerships, companies, and unincorporated entities) by covering their SGD monies placed with a Scheme member, for up to $75,000 per depositor per Scheme member. All full banks and finance companies in Singapore are required to be members of the Deposit Insurance Scheme. What is coveredThe Deposit Insurance Scheme covers deposits in SGD held in standard savings, current or fixed deposit accounts. It also covers SGD monies placed with any scheme member under the Supplementary Retirement Scheme, CPF Retirement Sum Scheme and CPF Investment Scheme. Up to $75,000 insuredIt is also worth noting that deposits are not insured separately in each branch office of a bank or finance company. This means that all your eligible accounts maintained with different branches of a full bank or finance company are aggregated and insured up to $75,000 with the same bank or finance company. Monies placed under the CPF Retirement Sum Scheme and the CPF Investment Scheme with a Deposit Insurance Scheme member are aggregated and separately insured up to $75,000. The $75,000 is a figure based on studies that show that the amount will fully insure a vast majority of non-bank depositors from losses on their insured accounts should their full bank or finance company fail. What is not insuredSome deposits or bank products are not covered by deposit insurance. They include:
These products carry higher risks and do not form part of the core savings or transaction accounts of small depositors. Those who buy them should be prepared to assume the higher risks for the potentially higher rewards. Is your deposit insured?With banks and finance companies constantly creating new products, it can be hard to know which deposits are covered by deposit insurance and which are not. An easy way to get such information is to go to their website or any of their branches and ask for their register of insured products. Scheme members are required to disclose in their deposit account statements, account opening forms, and marketing materials if they are offering insured products. How does deposit insurance create moral hazard and for whom?While deposit insurance may be regarded as a tool for stopping or minimising bank runs, it is also a source of moral hazard for excessive risk taking, which in turn may lead to more bank failures.
Who benefits deposit insurance?Deposit insurance provides three important benefits to the economy: It assures small depositors that their deposits are safe, and that their deposits will be immediately available to them if their bank fails.
What is the primary purpose of deposit insurance?The role of deposit insurance is to stabilize the financial system in the event of bank failures by assuring depositors they will have immediate access to their insured funds even if their bank fails, thereby reducing their incentive to make a "run" on the bank.
What is the most important feature of deposit insurance?The FDIC protects the money depositors place in insured banks in the unlikely event of an insured-bank failure. Each depositor is insured to at least $250,000 per insured bank. FDIC deposit insurance covers all types of deposits held at an insured bank.
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