Most countries require banks to participate in a federal insurance program intended to protect bank deposit holders from losses that could occur in the event of a bank failure. Although bank deposit insurance is primarily viewed as a means of protecting individual (and especially small) bank depositors, its more subtle purpose is one of protecting entire national banking and payments systems by preventing costly bank runs and panics. In a theoretical scenario, adverse news or rumours concerning an individual bank or small group of banks could prompt holders of uninsured deposits to withdraw all their holdings. This immediately affects the banks directly concerned, but large-scale withdrawals may prompt a run on other banks as well, especially when depositors lack information on the soundness of their own bank’s investments. This can lead them to withdraw money from healthy banks merely through a suspicion that their banks might be as troubled as the ones that are failing. Bank runs can thereby spread by contagion and, in the worst-case scenario, generate a banking panic, with depositors converting all of their deposits into cash. Furthermore, because the actual cash reserves held by any bank ... (200 of 11,416 words)Deposit insurance
Rationale for deposit insurance
-
Paper money from around the world.
-
The trading floor of a merchant bank in London.
-
Wampum beads made from clamshells by the Montauk Indians of Long Island, N.Y., U.S.
-
The Colonial Office in the Bank of England, unsigned watercolour by one of Sir John Soane’s draftsmen, c. 1818; in Sir John Soane’s Museum, London.
-
The Federal Reserve, Washington, D.C.
-
Bank vault in the HSBC building, Hong Kong.
-
Headquarters of the Oversea-Chinese Banking Corporation Limited overlooking the Singapore River, Singapore city.
-
The components of an automated teller machine (ATM).
-
A credit union near Thiotte, Haiti.
-
A worker in Nicosia, the capital of Cyprus, removes a Laiki Bank sign after having replaced it with a Bank of Cyprus sign on May 21, 2013. Under Cyprus’s bailout agreement with the European Commission, the European Central Bank, and the IMF, Laiki Bank’s assets and debts were transferred to the larger Bank of Cyprus.