join than those that are better managed. A voluntary system may fail to attract a sufficient number of members to accomplish its objectives. Also, large banks may
be able to opt out of the system and avoid the cost of the premiums without markedly affecting depositors’ willingness to place funds with them. In countries
with an uneven distribution of deposits, the cost of the scheme may become prohibitive for small banks without the full participation of large banks. Further-
more, a voluntary deposit insurance scheme is likely to produce periodic large-scale transfers of deposits within the banking system — from insured to uninsured banks
during good times and from uninsured to insured banks when individual banks are in trouble.
Unless a deposit insurance system is private
7
, most of the current systems in force make membership compulsory. From Table 1, we can see that out of 51 countries’
deposit insurance schemes, membership is compulsory in 34 countries e.g. Canada, Ireland, Japan, Sweden, the UK, and the US. Membership is optional in 13
countries, of which five France, Germany, Italy, Luxembourg, and Switzerland have private systems. Membership of a DPS can also be based on type of
depository institution. For example, in the US and Iceland, deposit protection schemes are compulsory for member banks and commercial banks, but are optional
for private banks and other depository institutions. Details on membership of the remaining four systems are not currently available.
4. Scope of coverage
4
.
1
. Institutions to be co6ered One has to decide whether a deposit insurance scheme should cover all deposi-
tory institutions or only some of them. Separate deposit insurance funds for banks and non-bank depository institutions have been created in the US, Iceland, Ireland,
Finland, and Norway. To arrive at a decision, one has to take into account several factors such as size
of the economy, maximum deposit protection as some countries have statutory minimum deposit constraints on some depository institutions, number and risk
characteristics of the depository institutions concerned, their exposure to failure, cross subsidization, effect on the structure of the banking system, and the intended
primary objective of the deposit insurance scheme. For a small economy which has the protection of small depositors as the deposit insurance objective, a single
scheme may be adequate.
7
Private deposit insurance schemes naturally allow voluntary membership.
4
.
2
. Residential requirement Should protection be provided only to local residents or extended to non-resident
depositors? The exclusion of non-resident depositors is open to criticism since the possibility of a run by the uninsured still exists. The exclusion of non-residents from
the DPS would incur additional administrative work and expenses, as banks do not typically distinguish accounts according to the residence of their customers.
This issue is straightforward. As shown in Table 2, 31 schemes do not have any residency restrictions. Information is not available for the remaining 20 countries.
That is to say, deposit insurance, once provided, is available to all depositors irrespective of their residency status provided, of course, that such deposits meet
all other necessary requirements for protection.
4
.
3
. Protection of deposits at foreign and domestic banks Another issue related to the scope of coverage is whether or not a DPS should
protect deposits in domestic branches of foreign banks. If such deposits are covered, the local DPS would be exposed to external threat from foreign countries.
As banks in countries with open financial markets are unavoidably subject to the same external risk, it may not be justifiable to exclude from protection deposits with
foreign branches in the domestic country.
The practice of branch coverage is also presented in Table 2. Twenty-six countries including the US, the UK, Sweden, Italy, Germany, France and Canada
extend protection to deposits in domestic branches of foreign banks. Such deposits should be covered as they are part of the banking system. A DPS would not be
fully effective if deposits with foreign banks located in the home country were not protected.
To the best of our knowledge, deposits in foreign branches of domestic banks are not protected in 18 countries. Only 12 countries, including Denmark, Finland,
Germany, Iceland, Italy, Japan, Mexico and Norway, extend protection to deposits in foreign branches of domestic banks.
4
.
4
. Currency of deposits to be protected Whether or not deposit insurance should be expanded to cover all domestic and
foreign currency deposits is controversial. This issue was raised in a 1995 Federal Deposit Insurance Corporation FDIC notice. It is sometimes argued that a
deposit insurance system is not intended to protect, and therefore, should not protect foreign currency deposits, as they are more investment-oriented. Depositors
who hold such accounts are deemed to be more willing to take risks.
If premiums are assessed only on local currency deposits, and foreign currency deposits are concentrated in large banks, then smaller banks may take a heavier
burden of the deposit insurance cost as they have little foreign currency deposits. Large banks can argue that there is no reason for charging premiums on foreign
currency deposits if these deposits are not insured. Huertas and Strauber 1986 p.
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38 Table 2
Scope of coverage
a
Country Deposits in domestic branches of foreign
Deposits held by Deposits in foreign branches of domestic
Inter-bank de- banks
non-residents banks
posits NA
NOT COVERED ARGENTINA
NA NA
Austria Not covered
Not covered Not covered
Covered Not covered
NA NA
Not covered Bangladesh
Belgium Not covered unless the fund is decided by 23
Covered if not already covered in the home Covered
Not covered majority of the management committee of the
country or covered to a lesser extent than in Belgium
guarantee fund Covered
Not covered Canada
Not covered Covered
NA NA
Chile NA
Not covered NA
Columbia Not covered
NA NA
NA NA
Czech Republic Covered
Not covered Denmark
Not covered Covered
Covered Covered
NA NA
NA NA
Dominican Republic
Covered NA
NA NA
El Salvador Covered
Finland Not covered
Covered Covered
Not covered Covered
Covered Not covered
France Not covered
Covered Covered
Covered Germany
NA NA
Covered Hungary
Not covered Covered
Iceland Covered
Covered Covered
India Not covered
Covered Not covered
Covered Not covered
Covered Covered
Not covered Ireland
Not covered Covered
Covered Covered
Italy Not covered
Covered Japan
Covered Not covered
Not covered NA
NA NA
Kenya NA
Korea NA
NA Covered
Covered Covered
Covered Covered
Kuwait Lebanon
Covered NA
NA NA
Not covered Covered
Covered Covered
Luxembourg
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39 Table 2 Continued
Country Deposits in domestic branches of foreign
Deposits held by Deposits in foreign branches of domestic
Inter-bank de- banks
non-residents banks
posits Covered
Covered Marshall Islands
Covered Covered
Mexico Covered
NA NA
Covered Covered
Covered Covered
Covered Micronesia
Not covered Not covered
Netherlands Covered
Covered Covered
Not covered Nigeria
Covered Not covered
Not covered Covered
Covered Covered
Norway NA
Peru NA
Covered NA
Not covered Philippines
Covered Not covered
Covered NA
NA NA
Portugal Not covered
Not covered Covered
Covered Spain
Not covered Not covered
Sweden Not covered except in EEC countries
Covered Covered
Not covered Covered
Covered Not covered
Switzerland NA
Taiwan Covered
Not covered Covered
Not covered NA
NA Not covered
Tanzania Trinidad and To-
NA NA
Covered Covered
bago Not covered
Covered Covered
Turkey Not covered
Not covered NA
NA Uganda
Not covered Covered
Not covered UK
Covered Not covered
Covered Covered
Covered Not covered
US NA
Venezuela NA
Implicit covered NA
NA Yugoslavia
Covered NA
NA
a
Note: Details not available for five countries. Sources: Abdulrahman 1995; Andre and Axel 1995 pp. 18–20; Banker 1991 p. 19; Bruyneel and Miller 1995; Canada Deposit Insurance Corporation 1993; Carisano 1992; Economist 1990, 1995; Fry et al. 1996; Hong Kong Government 1992;
Ko 1997; Kyei 1995; Fredbert 1995 pp. 60–61; McCarthy 1980; Norwegian Banking Law Commission 1995; OECD 1995; Pennacchi 1987, pp. 269–277; and Tally and Mas 1990, 1992.
21 argue that ‘‘…if foreign deposits were assessed, US banks would bear the cost directly. This would force these banks out of major wholesale markets abroad, with
adverse effects on them and on the US’s role in the international economy’’. Nasser 1989 shares this view and reports that assessing premiums on foreign currency
deposits may induce substantial cost and therefore jeopardize the competitive positions of large US banks vis-a`-vis their foreign competitors
8
. He therefore concludes that, with the internationalization of the banking business in the last
several decades, this issue has become one of the more controversial topics dividing bankers
9
. This remark is perhaps of special significance to those countries with international financial centers. Another risk that arises from not protecting foreign
currency deposits is the limited and partial protection to depositors, and conse- quently the threat to banking stability.
To arrive at a proper decision, a country should take into account the deposit structure, the primary objectives of a DPS, and interest differential between
domestic and foreign currency deposits. If the majority of deposits in a country are in foreign currencies and the primary objective of a DPS is to prevent general bank
runs, then there is a strong argument for protecting foreign currency deposits. For those countries with high interest differentials between local and foreign currency
deposits, the need to protect foreign currency deposits is less strong, as the foreign currency deposits are more investment-oriented.
Table 3 shows that currently, 14 countries confine protection to deposits in their local currencies only. Thirty one countries protect both domestic and foreign
currency deposits. Information is not currently available for the remaining six countries.
5. Level of protection
