Banks fulfill an essential function in any country. They facilitate payment of a large part of the operations executed in the economy (by means of checks, credit cards, or electronic money transfers). Also, they are the primary vehicle for persons with surplus funds, allowing them to save their surpluses so that they are transferred to others who need them for productive investment or consumer purchases.
On the other hand, banks are more vulnerable to problems of insolvency than other kinds of business corporations, because they lend fundamentally money that they in turn receive on loan from depositors. If, for any reason (devaluation, rising rates, economic problems in an industrial sector, etc.), a bank is unable to collect, for example, 15 percent of its outstanding credit, the shareholders will lose all their capital and the losses caused by the debtors’ default will be absorbed by the depositors. Because bank problems can affect other sectors of the economy, most countries have opted to establish a bank "safety net". This safety net, provided by governments, includes: a protective mechanism, usually referred to as "deposit insurance", credit facilities that the Central Bank offers banks with problems of liquidity in their function as "lender of last resort", and the system of regulation and supervision of intermediaries.
Development of deposit insurance schemes
The oldest deposit insurer, which is still in operation today, is the United States Federal Deposit Insurance Corporation, created by means of the Banking Act of 1933. Most deposit insurance mechanisms have been implemented over the last thirty years. In the past, many of these countries handled bank problems directly with public funds.
Today, almost all the developed countries have a deposit insurance scheme (e.g. Norway, Germany, Canada, Finland, Japan, Belgium, Spain, The Netherlands, France, the UK, Turkey, Switzerland, Mexico, Austria, Italy, and Ireland). As of May 2007, the International Association of Deposit Insurers (IADI) reported 118 countries with deposit insurance systems in operation, in planning, or in serious studies for implementation (95 in operation, 11 pending, and 12 in planning or in serious studies for implementation).
Most deposit insurance mechanisms have been implanted over the last thirty years. In many of these countries bank problems were previously handled directly with public funds.
In late 1986, the European Community Commission issued a recommendation on the advisability of all its member states establishing mechanisms to guarantee bank deposits.
It could be said that the purpose of deposit insurance is, on the one hand, to fulfill the social objective of protecting small depositors, and on the other to fulfill the economic objective of preserving the stability of the financial system.
