Research Handbooks in Financial Law series
Edited by Matthias Haentjens and Bob Wessels
Chapter 15: Deposit guarantee schemes
Deposit guarantee schemes (‘DGSs’) exist to protect depositors, in particular unsophisticated depositors, from losing their deposits in financial institutions including banks. Such schemes need not even be activated to provide value as the knowledge that such a safety net is available instils confidence in the market and encourages depositors to entrust their money to banks. The schemes thus provide an insurance function to depositors and in doing so promote financial stability within the country. DGS may be categorised as explicit or implicit. An explicit DGS involves an established and legally binding scheme giving insured depositors preferred creditor status. Following the closure of a bank, depositors are guaranteed that all or a proportion of the value of their deposits will be returned to them. An implicit DGS may be said to exist where there is an expectation that a government or a central bank will not allow a bank to fail. This may arise where a government has made public statements suggesting such a position or where it has provided support in the past. It may have done this where a bank has been perceived to be ‘too big to fail’ or ‘too important to the country to fail’ or even ‘too complex to fail’. It has been observed that although countries can formally scale back explicit DGS cover when a crisis recedes, ‘it is very difficult to eliminate conjectural coverages in a credible manner’.
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