[UPDATED] Ministry of Finance increases deposit insurance coverage

THE Ministry of Finance has announced an increase in deposit insurance coverage, from $125,000 to $200,000 on September 4.

In a release, the ministry said on August 28 Minister of Finance Colm Imbert signed both the Central Bank (Deposit Insurance) Order 2024 and the Central Bank (Deposit Insurance Coverage Ltd) order, which were both published on August 29.

The ministry said in the release both orders will take effect from October 1. The increase will align coverage levels with the IMF’s recommended ratios for coverage of one-two times GDP per capita, compensate for inflation, keep financial institutions in line with best practices and increase protection for banks in part or in whole who may not be able to pay debts when it is due.

The ministry also announced increases on the premiums levied on financial institutions from 0.2 per cent to 0.3 per cent over a two-year period.

The first increase will take effect on October 1 and will bring premiums up from 0.2 per cent to 0.25 per cent, with another increase to take place on October 1, 2025.

The increase will ensure the sustainability of the deposit insurance fund, fill the fund’s coffers and provide protection against potential risks and uncertainties, the ministry said.

What is deposit insurance coverage?

Deposit insurance covers the principal and interest of accounts under any insured bank. These accounts include checking, savings, money markets and certificates of deposit accounts.

Stocks and bonds are not covered under this type of insurance. Since Central Bank does not recognise most cryptocurrency as legal tender, cryptocurrency accounts may not be covered under this type of insurance either.

Therefore, if a bank should close, or a bank run – mass withdrawals from a bank – should force it into bankruptcy, account holders will be covered up to an amount determined by the Ministry of Finance.

This insurance helps people have more confidence in their banks, knowing that should their banks close, they will still be made whole, rather than lose all their savings.

In the US, deposit insurance started with the establishment of the Federal Deposit Insurance Corporation (FDIC) at the height of the Great Depression, when more than 4,000 banks closed in the first few months of 1933.

It was president Franklyn Roosevelt who signed the Banking Act of 1933, creating the agency.

In TT, the Deposit Insurance Corporation (DIC) was established by the Central Bank and Financial Institutions (Non-Banking) Act of 1986.

Both the FDIC and the DIC have the task of maintaining confidence in each country’s financial system.

The DIC does this through the management of the deposit insurance fund, which holds premiums from the bank in the event of any closure.

Deposit insurance – a bailout for citizens

While some companies may be able to depend on government intervention, deposit insurance can act as a bailout for citizens who put their savings in the bank.

In 2023 – one of the US’s biggest years for bank failures – five banks failed, including Silvergate bank on March 8, Silicon Valley Bank on March 12, First Republic Bank which was seized by the FDIC on May 1, Heartland Tri-State Bank which failed on July 28 and Citizens Bank of Iowa which failed on November 3.

First Republic Bank was sold over to JP Morgan Chase & Co
, all their assets had been seized by the FDIC in May.

By that time, the FDIC had already paid $23 billion on bank collapses.

The San Francisco-based First Republic Bank had been wobbly since Silicon Valley Bank’s collapse, as bank runs prompted other institutions to put about US $30 billion in deposits in the hope of stabilising the company.

Factors that contributed to the bank’s failure included a decision to grow its mortgage portfolio by undercutting competitors on price. This came after the Fed started raising interest rates so when the market value of the loans had fallen, the bank had to sell mortgages below par in order to raise capital.

When the bank finally failed, the FDIC took a US $15.6 billion hit by paying insurance claims up to US $250,000.

The bank, which catered to affluent customers, also had a concentration of deposits that exceeded US $250,000.

As a result, the top banks in the US would have to fork out approximately $5.8 billion a year to refill the FDIC’s coffers, a move that could whittle each bank’s earnings per share by a median of three per cent.

JP Morgan is expected to pay US $1.3 billion annually, Bank of America Corp will pay an estimated US$1.1 billion and Wells Fargo & Co was expected to pay an estimated US $898 million.

The payments are expected to be made over eight quarters beginning in June this year, but it may be adjusted as estimated losses to the FDIC fund changes.

However, while taxpayers may not pay the bill directly, losses may trickle down to customers. If a bank has to pay for more deposit insurance, it might charge a higher interest rate on a loan or offer lower interest rates on a savings account.

This story has been adjusted to include additional details. See original post below.

THE Ministry of Finance announced an increase in deposit insurance coverage, from $125,000 to $200,000 on September 4.

In a media release the ministry said on August 28 Minister of Finance Colm Imbert signed both the Central Bank (Deposit Insurance) Order 2024 and the Central Bank (Deposit Insurance Coverage Ltd) order, which were both published on August 29.

The ministry said in the release both orders will take effect from October 1.

The ministry said the increase in coverage will align coverage levels with the IMF’s recommended ratios for coverage of one-two times GDP per capita, compensate for inflation, keep financial institutions in line with best practices and increase protection for banks in part or in whole who may not be able to pay debts when it is due.

The ministry also announced increases on the premiums levied on financial institutions from 0.2 per cent to 0.3 per cent over a two-year period. The first increase will take effect on October 1 and will bring premiums up from 0.2 per cent-0.25 per cent, with another increase to take place on October 1, 2025.

The increase will ensure the sustainability of the deposit insurance fund, fill the fund’s coffers and provide protection against potential risks and uncertainties.