Deposit insurance aims to maintain public confidence and avoid banking panic by securing a predefined deposit for qualifying bank customers. Even though this seems straightforward, deposit insurance has several crucial determinants. Not every bank deposit qualifies for protection and therefore some creditors see their deposit being subordinated in banking failure. Deposit insurance is covered by domestic deposit protection schemes or deposit guarantee schemes. Both systems are identical where central banks choose to name their local scheme.
Countries have sovereign rights to design their own rules. Collaboration between countries in a trade block or single market triggers uniformity. Yet, the scope, nature and coverage of domestic deposit protection schemes may vary per country. This especially is true when economic circumstances vary and purchasing power parity is distinct. Administration of a deposit protection scheme is often executed by a central bank. The announcement of the activation of a deposit protection scheme is done via the state journal and the website of the local central bank.
The funding of deposit insurance contains premiums paid by participating financial institutions. A risk-based profile of the creditor base determines the amounts paid by individual participants. Several business categories are excluded from coverage and fraudsters who are unconditionally convicted may see their claim subordinated in an insolvency hierarchy.
Deposit protection schemes have a limited scope. Mostly, deposit insurance is a pre-payment of the insured deposit where the administrator of the scheme gets a priority position in the insolvency or creditor hierarchy when the bank gets liquidated. As such, the scheme must close prior to the start of the liquidation procedures. Creditors failing to claim their insured deposit see their full balance subordinated in the hierarchy. Hence the reason creditors need to evaluate their options and maximize their potential.