A Toolkit for Developing a Deposit Insurance Scheme
Monday, Apr 24, 2023

A Toolkit for Developing a Deposit Insurance Scheme


The toolkit is intended to be a resource for prospective and existing deposit insurers in developed and developing countries, as well as other participants in a country’s financial safety net.

This Toronto Centre Toolkit was prepared by Claire McGuire and John O’Keefe. Please address any questions about this Toolkit to This email address is being protected from spambots. You need JavaScript enabled to view it.


  1. Introduction

  2. Initial Considerations for Insurance Scheme Design

    1. History, Benefits and Costs of Deposit Insurance

    2. Adverse Selection and Moral Hazard in Deposit Insurance

  3. Setting Up a Deposit Insurance Agency

    1. Private versus Public Systems

    2. Funding Issues (seed funding, ex-ante funding, back-up funding)

    3. Determining Which Deposits Will Be Covered By Deposit Insurance and How

    4. Drafting a Deposit Insurance Law (outline of a model law provided)

  4. Strategic Role of the Deposit Insurer

    1. Determining the Public Policy Objectives (Core Principle 1)

    2. Determining the Mandate (CP 2)

  5. Organizational Issues for Deposit Insurers

    1. Determining the Appropriate Governance Structure (CP 3)

    2. Developing a Good Organizational Structure

    3. Legal Protection (CP 11)

    4. Adopting a Business Continuity Plan (CP 6)

    5. Managing Operational Expenses

  6. Crisis Management and Resolution Issues Affecting the Deposit Insurer

    1. Developing a Crisis Management Playbook (CP 6)

    2. Representation of Deposit Insurer on Crisis Management Committees (CP 6) 

    3. Issues Involved in Determining the Optimal Hierarchy of Claims in Liquidation 

    4. Hierarchy of Claims and Failure Resolution Costs 

    5. Funding of Failure Resolution (CP 9) 

    6. Recoveries (CP 16) 

  7. Design Features 

    1. Setting Premiums (CP 9)

    2. Funding Issues (ex-ante funding, back-up funding) (CP 9)

    3. Establishing a Target Fund (CP 9)

    4. Setting and Re-evaluating Insurance Coverage Levels (CP 9)

    5. Adopting Risk-Related Premiums (CP 9)

    6. Memoranda of Understanding

      1. With Other Members of the Safety Net

      2. With Other Deposit Insurers (cross-border)

  8. Fund Management

    1. Sources and Uses of Deposit Insurance Funds

    2. Stakeholders versus Shareholders

    3. Investment Portfolio Risk

      1. Credit Risk

      2. Market Risk

      3. Liquidity Risk

    4. Investment Policy

  9. Preparing for Insured Depositor Pay Outs (CP 15)

    1. Use of Paying Agents

    2. Alternative Methods for Paying Claims

    3. Determining Insured Amount (issues of set-off, aggregation of accounts including treatment of joint accounts)

    4. Access to Real-Time Information

    5. Use of Legal Identifiers

  10. Public Awareness Strategies (CP 10)

    1. Essential Criteria

    2. Measuring the Effectiveness of Public Awareness Strategies

    3. Developing Communication Protocols

  11. References

  12. Recommended Readings

  13. Analysis Tools

  14. Templates of Deposit Insurance Laws, Operations, Policies and Agreements


Bank deposit insurance can be an important part of a country’s financial sector safety net and, as a result, deposit insurance schemes have been adopted by a large number of countries. The purpose of this document is to provide a toolkit for the establishment and further development of deposit insurance schemes. The toolkit is intended to be a resource for prospective and existing deposit insurers in developed and developing countries, as well as other participants in a country’s financial safety net. The toolkit includes: 1) a guide for the development of a deposit insurance scheme, 2) templates for legislative, legal, and organizational documents (e.g., deposit insurance laws, organizational charts, corporate governance policies, crisis management plans), and 3) analysis tools for determining insurance premium systems, premium rates, and the target insurance fund. Templates and analysis tools included are embedded documents and, where necessary, as internet links to materials.

The deposit insurance guide included in this document discusses aspects of deposit insurance scheme design from three perspectives. The first perspective is the legal basis for the insurer (i.e., a Deposit Insurance Act or equivalent legislation establishing a deposit insurance scheme) that, in turn, determines the insurer’s mandate and powers (e.g., failure-resolution methods, reimbursement of insured depositors, failed-bank receiver/liquidator, levy assessment/premium setting, bank regulation, access to supervisory information and access to insured banks) and responsibilities for day-to-day operations and financial crisis management. The second perspective is the design of the deposit insurance framework (e.g., coverage, claims priority and insurance premiums (assessments)). The third perspective is the organizational design and governance of the deposit insurer that is determined by the previous two design factors, as well as by the underlying economic, governmental and legal systems. The guide draws from recommendations provided by the International Association of Deposit Insurers, International Monetary Fund, World Bank Group, the Financial Stability Board, European Commission, national public sector bank regulators (e.g., Bank of England, U.S. Federal Deposit Insurance Corporation) and academic research.


The Toolkit is designed for a deposit insurer that operates under a “paybox-plus” model, which is the most common model worldwide. Such a model represents a practice that allows a deposit insurer to contribute to resolution actions and thus provide the resolution authority with a greater ability to implement a cost-effective resolution and avoid the disruption of a liquidation action often at a lesser cost. In general, however, each jurisdiction should select a deposit insurance model that best suits their legal, economic and regulatory environment.

In preparing this guide we assumed the following: 1) the deposit insurer is an independent agency of the national government, and 2) co-insurance of deposits is not available. Should these assumptions not hold true, the recommendations provided by this guide and toolkit may have to be modified to fit the individual country’s framework. The toolkit can be applied to deposit insurance schemes for any type of depository institution—e.g., commercial banks, specialty banks, savings associations and credit unions—which we refer to as banks in this document.


The Guide and Toolkit can be used as starting points for deposit insurers that wish to develop the appropriate forms, agreements and Memoranda of Understanding to improve their operations and make deposit insurance more widely known and understood in their jurisdictions or as a way to amend forms and agreements already in existence. The outline of the Guide and Toolkit largely draws from the governing principles for deposit insurers set forth in the International Association of Deposit Insurers Core Principles for Effective Deposit Insurance Systems, and practices recommended or applied by the aforementioned international and national organizations concerned with deposit insurance as well as academic research.


The strengths and weaknesses of deposit insurance schemes can be traced to scheme design and how that design aligns with public and private sector institutions as well as legal and regulatory systems in the jurisdiction. In this section we review the origins of deposit insurance from historical and theoretical perspectives.


Banks have existed since medieval times (e.g., Medici Bank of Florence in the 1400s) and banking services can be traced to the Roman empire. Despite the early origins of banking, deposit insurance is a relatively recent phenomenon. The first deposit insurers in the U.S. appeared in the 1880s as state- sponsored and private systems; all these early deposit insurers failed. Czechoslovakia was the first country to establish a national deposit insurer in 1924.The United States was the second country to establish a national deposit insurer, the Federal Deposit Insurance Corporation (FDIC), in 1933 as part of the New Deal economic support programs enacted after the U.S. Great Depression. This history raises questions about why it took so long for deposit insurance to appear compared to banks and why did government support deposit insurance spread globally in the latter half of the 1990s and early 2000s?

A key to understanding deposit insurance is to compare its history to that of other types of insurance, such as fire, property, and life insurance. The first property insurers in the United Kingdom that insured merchandise and ships appeared in 1601. The types of insurance available in the United Kingdom expanded over time to include fire insurance in 1666. Life insurance was first offered in the United States in 1759. There are important differences between fire, property and life insurance versus deposit insurance that help explain the late development of deposit insurance. The first difference is that insurance contracts for fire, property, and life insurance cover physical objects where loss usually occurs due to independent events. Under these circumstances, actuarial science can devise contracts that are both affordable to the insured and profitable to the insurer. Should large-scale events occur that trigger widespread claims and insurer losses, the insurer will most certainly fail but such events are historically rare (e.g., severe weather causing fire, flood, and loss of merchant ships). Importantly, both the insurer and insured have knowledge of the underlying risks and rewards of the insurance contract, i.e., there is less opportunity for adverse selection than occurs with deposit insurance. Fire and property insurers can inspect the property and learn its true market value. Further, the insurance contract can include conditions that nullify the contract should there be fraud on the part of insurance claimants. This is very different from the situation created by national deposit insurance where insured depositors only have access to aggregated bank financial data—income statements and balance sheets—and whatever information bank supervisors might provide (e.g., in the U.S. supervisory enforcement actions against banks that violate laws and engage in unsafe and unsound practices).

In addition, with fire, property and life insurance there is less opportunity for moral hazard than occurs with deposit insurance. Specifically, moral hazard in deposit insurance is the reduced incentive of insured depositors and bankers to monitor risk due to the insurance provided. Moral hazard in banking is encouraged by the implicit or explicit guarantee of the national government that accompanies the deposit insurance offered to depositors. A merchant shipping company will have less opportunity to defraud the insurer if the insurer can inspect cargo and vessel. This is very different from the situation insured depositors and bankers face where insured depositors have little incentive to monitor the bank’s risk of illiquidity and insolvency. Further, bank management typically has little financial stake in the bank but can extract substantial wealth through salaries, bonuses, and severance packages even while making negative net present value investments for the bank.

Regarding fire, property, and life insurers, we should ask who monitors their condition? These types of insurers rely primarily on premiums from insured customers for funding and these customers have reason to monitor insurers’ ability to perform on the contract. Further, jurisdictions establish insurance regulators to oversee insurance companies’ activities and monitor their condition, and also establish guarantee funds that provide financial support for customers of failed insurance companies. To conclude, the prevalence of adverse selection and moral hazard in deposit insurance suggests deposit insurance is not a profitable private sector enterprise and a risky public sector enterprise; we explore these issues further in the next section.


Calomiris and Jaremski review the extensive literature on deposit insurance and state that the spread of deposit insurance can be explained by two alternative theories. The first is the traditional economic rationale for deposit insurance as a means of limiting bank runs. To begin, consider the causes of bank runs. Individuals find the maturity transformation function banks provide to be beneficial. Small depositors are generally unable to monitor the use of credit they might provide directly to firms and other individuals, as well as indirectly through banks, due to the high costs of monitoring those obligors. Individuals do, however, value the use of bank deposit accounts for transactions and are willing to lend to banks (deposit accounts) and delegate the monitoring of the ultimate borrowers (bank loans to businesses and individuals) to banks. Bank lending becomes less risky as the scale and scope of lending increases due to the diversification of loan portfolios, all other factors being equal. Banks are still exposed to losses due to credit cycles where credit risk cannot be sufficiently reduced through loan portfolio diversification to limit the risk of bank insolvency.

Whether due to macroeconomic conditions or idiosyncratic bank problems, some bank depositors will find reason to withdraw deposits when perceived bank illiquidity and/or insolvency risk is high and not wait until banks become illiquid and/or insolvent before doing so. Large-scale withdrawal of deposits can lead to severe illiquidity at a bank (liquidity insolvency). Depositors are aware of the “first come, first serve” reality of deposit withdrawals and this can precipitate widespread withdrawals of deposits (i.e., a bank run). Further, a run on one bank can lead to runs on other banks perceived to be in the same position as the initial bank, broadening the crisis. Bank runs have occurred historically with banks lacking deposit insurance, most prominently in the U.S. in 1929, resulting in the Great Depression. Bank runs have also occurred with banks that offered relatively limited deposit insurance. The United Kingdom bank, Northern Rock, experienced a bank run in 2007 when the public became aware of its severe illiquidity due to losses on subprime real estate loans. At the time of the run on Northern Rock, UK’s deposit insurance covered 100 percent of the first £2,000 of deposits and 90 percent of the next £33,000 in deposits, resulting in a maximum coverage level of £31,700. The 2006–2007 average income in the U.K was £23,325; it is likely that many individuals had deposit balances above £2,000 at Northern Rock and would likely lose money should the bank fail.

Deposit insurance can greatly reduce the risk of bank runs if the insurance is credible and coverage is sufficiently high. Calomiris and Jaremski point out that the economic benefits of deposit insurance come at a cost—reduced market discipline. The fact that many bank creditors have less need to monitor banks’ condition when deposit insurance is provided can result in increased risk tolerance by bank managers, senior executives and boards of directors. Reduced incentives to monitor risk by bankers and insured depositors is the moral hazard problem of deposit insurance. The moral hazard problem is compounded by a second problem in banking, adverse selection. The fact that depositors find it costly to monitor banks and those to whom banks lend means bank borrowers and bank management have an information advantage relative to depositors. Historically, bankers and bank borrowers have used that advantage to their benefit at the cost to depositors and deposit insurers. Most recently, moral hazard and adverse selection contributed to the 1980s U.S. Savings and Loan (S&L) crisis and 2007–2009 global financial crisis.

Governments that offer deposit insurance can offset a portion of the loss of market discipline through prudential supervision and regulation of banks, i.e., regulatory discipline. Calomiris and Jaremski [3] explain that regulatory discipline is unlikely to be as effective as market discipline because regulators do not have a monetary stake in banks and are subject to political pressures that can lead to ineffective bank regulation and supervision. This latter situation leads us to the second theory of deposit insurance, the political theory. Under the political theory of deposit insurance Calomiris and Jaremski [3] argue that certain constituencies in a jurisdiction can benefit from deposit insurance because it provides a subsidy to banks and bank borrowers. Implicit in the subsidy argument is the belief that deposit insurance is underpriced. This insurance subsidy and attendant moral hazard and adverse selection problems were evident in the 1980s S&L and 2007–2009 U.S. financial crises in which a period of de-regulation and de-supervision allowed thrifts and banks to dramatically increase loan portfolio concentrations of subprime commercial and residential real estate loans. Since real estate markets are prone to boom-bust cycles, the market crashes were inevitable. In both market collapses the deposit insurer was unable to cover losses at failed S&Ls and banks. The Federal Savings and Loan Insurance Corporation (FSLIC) that insured S&Ls became insolvent in 1989 after the U.S. Congress denied FSLIC’s requests for emergency funding. The FDIC’s Deposit Insurance Fund (DIF) became negative in 2009–2010 after accounting for contingent loss reserves for anticipated bank failures. The financial support programs the U.S. Treasury and Federal Reserve System offered to banks during the 2007–2009 financial crisis included capital injections under the Temporary Asset Relief Program (TARP) that helped many banks avoid insolvency, allowing the FDIC to reverse the loss reserve and restore its capital. The 2007–2009 financial crisis’ strain on the FDIC’s liquidity was severe, forcing the FDIC to use shared loss agreements to resolve bank failures. Shared loss agreements allow failed-bank asset acquirers to keep problem assets and work out credit problems over time with borrowers, sharing losses on acquired assets with the FDIC. Had the FDIC needed to place all failed-bank assets in receiverships and liquidate those assets over time there would have been insufficient liquid funds to pay insured depositors.

Calomiris and Jaremski [3] conclude that the political theory of deposit insurance explains the spread of deposit insurance internationally. If that conclusion is correct what we are left with is a trade-off between competing interests that should be considered when designing a deposit insurance scheme—i.e., design a deposit insurance system that can benefit small savers without being exploited by individuals and groups that can benefit from adverse selection. There is also a need to be sure that individuals cannot exploit the benefits of deposit insurance by structuring accounts in order to take advantage of deposit insurance coverage. For example, if a jurisdiction were to treat joint accounts as separately insured from individual accounts without aggregating individual interests in each joint account there would in effect be no coverage limit for an individual account holder who opened multiple joint accounts.


In establishing deposit insurance within a jurisdiction there are many issues to consider. One of the primary benefits of having deposit insurance is that the cost of protecting depositors with relatively small amounts of deposits (“small depositors”) should a bank fail is borne by the member institutions rather than the public through the collection of premiums from insured entities and the establishment of a deposit insurance fund. Thus, one of the first steps a jurisdiction could take in deciding to adopt deposit insurance is to establish a deposit insurance fund and begin collecting premiums from whatever financial institutions will become part of the system (for example banks, credit unions or other credit cooperatives). This fund will then begin to grow even as the final contours of a rules- based system are debated and adopted. This fund can be established within the Central Bank with a small staff dedicated to managing the collection of premiums and investments of the collected funds or in an independent organization established for such purpose. In some jurisdictions the deposit insurance fund may remain part of the Central Bank or another entity as an independent unit particularly if the number of financial institutions contributing to the fund is small and the availability of qualified personnel to set up and run a stand-alone agency is limited.

It could be that establishing an explicit, rules-based, limited coverage deposit insurance system will at first create a need for public assurances about the health of the banking system if depositors had been operating under a belief that their deposits in banks were covered by an implicit guarantee. In such situations the government steps in to cover deposits when a bank fails, thereby covering either all or at least some deposits, usually of small depositors. Moving from such implicit guarantees to an explicit system therefore requires a substantial public education effort about how such an explicit system would work. Adoption of explicit deposit insurance should be done at a time of stability in a country’s banking system so as not to put immediate stress on a new deposit insurer and potentially create a lack of confidence that such a new institution could perform effectively in a crisis.


Public deposit insurance systems are the most common and, in many ways, can be considered to be a good practice. However, private deposit insurance systems do exist in a number of countries and the debate on the issue of whether such systems are preferable to public ones continues. However, one important challenge for private systems is the necessary constraint on the sharing of information on the condition of member institutions with that institution’s competitors and the rules surrounding bank secrecy. It may also be difficult to provide the necessary level of back-up funding to a purely private system whereas a public deposit insurer should have access to sources of public funds both for liquidity purposes and as a backstop if needed for paying insured depositors at the time of a bank failure. In such cases there could be pressure on the government to provide funding to avoid the potential contagion effects from an inability to pay depositors.


Funding of a deposit insurer is needed not only as it is set up but also on an ongoing basis as described above. It may be that seed money for a deposit insurer can be provided from some sort of public funding or by assessing a fee for institutions to join the deposit insurance system followed by the regular assessment of premiums on a periodic basis. Funding is increasingly done on an ex-ante basis for deposit insurers, thereby providing for the payment of premiums into a fund that accrues and is thus available in advance for use at the time of a bank failure. There are some deposit insurers use ex-post funding, thereby collecting the funds used to make a depositor payout once the payout is completed. There can also be a combination of both ex-ante and ex-post funding where a depleted deposit insurance fund is replenished through an assessment on the industry after a payout. Regardless of the type of funding there is a need for a certain source of backup funding for the deposit insurer so that the public can be confident that insured deposits will be able to be reimbursed promptly in the case of a bank failure. This is specifically addressed in IADI Core Principle 9, Sources And Uses Of Funds.


An analysis of the deposit structure within a jurisdiction is essential to determining how best to set up a deposit insurance system. Deposit insurance is a tool to protect most but not all depositors in a banking system and should be designed to accomplish that goal by excluding from coverage large deposits. Exclusions from coverage can include certain categories of deposits (such as inter-bank deposits) and types of deposits (e.g., those held by insiders at an institution) and those deposits exceeding the coverage limit (e.g., the deposits held by large corporates will in most cases exceed the deposit insurance limits in place). It may be that in some jurisdictions only deposits held by individuals are covered which could have an impact on small businesses within that jurisdiction in the case of a bank failure. Core Principle 8, Coverage, addresses the issues of the level and scope of deposit insurance, requiring clear definitions of both by the deposit insurer. An increasingly important issue for deposit insurers is how to treat new developments in financial technology that are blurring the once- distinct lines between deposits and payment systems, such as e-money. Greater deposit insurance coverage of these newer methods of storing money may in some circumstances contribute to greater financial inclusion. As methods of value storage and payment accessibility are evolving deposit insurers will need to assess whether and if so how to cover these new financial instruments and how to plan for and pay out holders of such instruments if needed in the event of a bank failure.


The IADI Core Principles, as well as the Financial Stability Board’s Key Attributes of Effective Resolution Regimes for Financial Institutions, should be reflected in the legal framework governing the deposit insurance system. The law should cover the objectives of the deposit insurance scheme, the establishment of the insurer as a stand-alone agency or as part of an appropriate existing government agency, a specification of the mandate and powers of the deposit insurer, its governance arrangements, its funding structure including its ability to borrow in support of its mandate, and all other aspects of the deposit insurer’s operation as a member of the jurisdiction’s financial safety net. The Toolkit contains a Model Deposit Insurance Act (Appendix 13.9) to aid deposit insurers in crafting an appropriate governing law.

It is important to note that we have not distinguished between common and civil law jurisdictions in this paper although that distinction is important in structuring the laws governing a deposit insurer’s operations. In civil law jurisdictions the laws are almost entirely codified, requiring more detailed legal frameworks to be in place. Common law jurisdictions on the other hand depend to a substantial extent on published judicial opinions interpreting the legislative language in place. The model law we have attached can act as a guide for qualified practitioners within a jurisdiction to refer to when developing a law that fits within whichever legal structure is in effect in their jurisdiction.

The deposit insurance law must align with the laws governing bank resolution and supervision generally and should not be inconsistent with other laws governing the financial system. There should be a specific reference to the priority of claims that will govern the failure of a financial institution which may differ in important respects from the priority of claims that govern a corporate bankruptcy. If there is any distinction to be drawn between how claims will be paid in different types of financial institutions (for example, differing coverage levels for deposits held in smaller institutions such as credit cooperatives from larger institutions such as banks) the reason for such distinctions should be clear and should not unduly complicate the payout process for the deposit insurer or interfere with its ability to recoup its payments from available repayment sources.


A deposit insurer is an important part of the financial safety net in any jurisdiction and as such a full partner with other safety net players in terms of information sharing, crisis preparedness and crisis management for the sector. This is true regardless of the deposit insurer’s mandate as understanding risks to the financial sector which could result in the need for the deposit insurer to mobilize its funds is essential to prudent management of the insurance fund and readiness in case of a need for an insured deposit payout.


A deposit insurer should have its contribution to the stability of a country’s financial system as one of its public policy objectives. This is because the existence of deposit insurance should lessen the possibility that depositors who perceive that a financial institution is troubled will “run” from that institution by withdrawing their deposits, potentially exacerbating an institution’s problems or even contributing to a perception that all financial institutions are unsound and thus creating the risk that depositors at even healthy institutions begin to withdraw their funds. The existence of deposit insurance may also increase trust in the banking system and therefore encourage more people to open bank accounts, thereby decreasing the unbanked population in a jurisdiction.

The fundamental public policy objective for a deposit insurer should be the protection of depositors, but focused on smaller retail and non-retail depositors (small and medium enterprises (SMEs). Large corporate depositors (including banks holding inter-bank deposits) are better positioned to monitor the condition of the financial institution with which they conduct business and thus theoretically can avoid the possible losses they could incur from a failure of such an institution. Covering such large depositors may create the possibility of increasing the moral hazard that can be associated with deposit insurance although the deposit insurance limit will most likely represent an insignificant portion of a large company’s bank deposits.

Other public policy objectives may also focus on failure resolution of financial institutions. The introduction of deposit insurance can shift the cost of such failures to a privately funded deposit insurance system from what in many countries in the past might have been the government. A formal deposit insurance system can also result in a more orderly and efficient resolution process, thereby advancing the public good of speedier and more certain depositor reimbursement.


IADI defines the term “mandate” as the “set of official instructions describing the deposit insurer’s roles and responsibilities. There is no single mandate or set of mandates suitable for all deposit insurers. When assigning a mandate to a deposit insurer, jurisdiction-specific circumstances must be taken into account. Mandates can range from narrow “paybox” systems to those with extensive responsibilities, such as preventive action and loss or risk minimisation/management, with a variety of combinations in between. These can be broadly classified into four categories: Paybox, Paybox plus, Loss Minimiser and Risk Minimiser as defined by IADI.

There is no preferred mandate for a deposit insurer and the choice of a mandate should be informed by individual country circumstances, policy considerations, resource issues and experience within a jurisdiction with bank failures. However, it has become increasingly clear that a solely paybox mandate where the deposit insurer is empowered to pay insured depositors only if a financial institution’s license is withdrawn and the financial institution is closed may not serve the needs of a financial sector where a transfer of insured deposits to a healthy institution when an institution becomes non- viable is not only possible but preferred to avoid disruption to established banking relationships. In order for the deposit insurer to participate in such a transfer by supplying funds in support of the resolution it is necessary that it has the more flexible paybox-plus mandate.

There are jurisdictions where the deposit insurer has the broader mandate of a loss minimiser or a risk minimiser but these jurisdictions often have a large number of financial institutions or financial institutions that, due to their complexity, might require highly developed resolution regimes. Many of these jurisdictions also have long established deposit insurance systems that have gained significant experience in serving as either risk or loss minimisers. It can be challenging to set up or expand a deposit insurer’s mandate beyond that of a paybox plus and, in a country where bank resolution is not needed on more than a periodic basis, it may not be the most efficient use of either human or financial resources. For example, where a bank resolution may occur only once in a decade it may not be efficient to have a deposit insurance agency whose mandate includes acting as a resolution authority if such a mandate requires human and financial resources that are not utilized fully in other activities in the agency.


There are certain functions that must be performed by any deposit insurer no matter what mandate it has. Such functions include reimbursing insured depositors of failed banks, management of bank resolution issues, collection of insurance premiums, the investment of such funds, the gathering and management of insured deposit data, the outreach to member institutions and the public about the operation of the insurance system, interactions with other members of the financial safety net and external relations with the press and others such as international organizations on the operations of the deposit insurance system. An effective deposit insurer also must have strong internal controls and accountability systems in place. Depending on the mandate or other responsibilities given to the deposit insurer it may also be necessary that there be personnel devoted to other tasks such as member institution supervision or receivership management. Appendix 13.10 presents an example of an organizational chart reflecting these various functions.


Core Principle 3 sets forth the rules for governance of deposit insurers. It requires that the deposit insurer “should be operationally independent, well-governed, transparent, accountable, and insulated from external interference.” The Board and management of the deposit insurer are responsible for the prudent management of the agency’s funds which, as noted below, should be part of a transparent process with appropriate disclosures to stakeholders. This standard envisions a deposit insurer that has the ability to execute its functions free from any political or other undue influence that would hinder it in accomplishing its mission. As discussed in section 2, the moral hazard problem for deposit insurance can arise in both banks and the deposit insurer.

Most deposit insurers are governed by a Board of Directors that appoints a Chief Executive Officer or management team that manages the day-to-day responsibilities of the insurer. This structure allows for the separation of board and management to allow for more independent oversight of the deposit insurer’s overall operation. An appropriate governance structure should advance the deposit insurer’s ability to manage its resources to grow its fund and limit its administrative expenses by avoiding excessive operational costs (e.g., by paying excessive board fees). There should be an odd number of positions on the Board of Directors for the deposit insurer to avoid the possibility of a tie vote when decisions need to be taken which, for most jurisdictions, would result in a Board of Directors made up of three or five members. Active bankers should also not be on the Board to allow for the sharing of information without concern of one financial institution learning of information about a competitor that might present an actual or perceived conflict of interest. It is important, however, to have private sector involvement on the board to enhance perceived independence and minimize regulatory capture. Board members should meet clear qualification standards, be covered by fit and proper rules and have no conflicts of interest that would present any issues in their board service.

Core Principle 3 makes clear that although the deposit insurer should be subject to oversight by a higher authority in accordance with general good governance practices it should be operationally independent and not be under the control of another agency or interested entity. There could be established performance metrics in place for the deposit insurer for example and such metrics could be subject to monitoring by the higher authority along with reporting requirements such as the requirement that the deposit insurer prepare an annual report. There must also be strict conflict of interest rules in place to avoid the possibility or even the perception that members of the Board could profit from their access to confidential information.


After consideration of the appropriate governing board structure for the deposit insurer (i.e., three or five board members, non-government non-ex-officio chair of the board, non-active banker members, ex-officio members and other qualified members such as academics or accountants) as discussed above the next task should be to set up an appropriate organizational structure to address all needed functions. No matter its mandate every deposit insurer will need a properly designed and staffed internal audit function, legal, research, IT and administrative capabilities to properly manage

its operations. In some smaller jurisdictions the deposit insurer may be able to make use of certain functions within the central bank or supervisory agency to have access to needed services like IT without having to expend its own resources to develop independent systems. All necessary safeguards would of course have to be in place to ensure the integrity of the systems devoted to the deposit insurer’s functions. For some deposit insurers there might be a need for a separate function to manage liquidation or receivership operations. A draft of an organizational chart is attached as Appendix 13.10 as a starting point for consideration of the needs of any given deposit insurance organization.


IADI Core Principle 11 addresses the need for those working for the deposit insurer (and its former employees) to have legal protection so that actions taken in the course of the good faith performance of their duties cannot result in personal liability arising from actions, claims, lawsuits or other proceedings for their decisions, actions or omissions. Such protections are essential in order to protect employees of the deposit insurer from the potential chilling effect of the fear of being sued by a disgruntled depositor. The protection should also extend to those working for or engaged by the deposit insurer, such as lawyers or accountants, (with of course adequate oversight) because many functions performed by a deposit insurer in making insured depositors whole are carried out by contractors hired for the specific tasks associated with the closing of a financial institution. The Model Deposit Insurance Act (Appendix 13.9) contains language reflecting the need for legal protection to extend beyond current employees of the deposit insurer in Articles 96 and 97. The legal protection provided for the deposit insurer should also be available to those working as supervisors and resolution personnel in the financial system to avoid the possibility that a lack of such protection will prevent the relevant authorities from taking the necessary actions to address shortcomings in a financial institution’s operations that may of necessity lead to that institution’s exit from the financial system in accordance with good international practice.


IADI Core Principle 6 addresses the role of the deposit insurer in contingency planning and crisis management and is discussed in section 6.1. However, as part of such preparedness by the deposit insurer itself it is essential that a Business Continuity Plan (BCP) be developed and implemented as needed. (See Appendix 13.2 for Outline for a BCP). Business continuity planning is the process involved in creating a system of prevention and recovery from potential threats to an institution and is designed to ensure that personnel and assets are protected and are able to function quickly in the event of a disaster. The process of developing a BCP involves defining any and all risks that can affect operations as part of an organization’s risk management strategy. Risks may include pandemics, war, natural disasters and, of increasing importance in protecting a deposit insurer’s operations, cyber-attacks. Some of these risks may require the deposit insurer to be able to work remotely and to access information through off-site facilities and equipment.


It is essential that a deposit insurer manage its resources efficiently and effectively in order to build and maintain its insurance fund. As a deposit insurer begins operations it will have significant expenses such as those associated with developing the necessary computer systems and training staff to be prepared for an insurance payout. However, there should be oversight by the management of the institution at the highest levels to ensure that administrative expenses remain reasonable and that such expenses are fully disclosed to stakeholders. See, e.g., Appendix 13.9, Model Deposit Insurance Act Article 6.

It may be appropriate for management to adopt in a transparent manner a benchmark for such expenses as a percentage of its operating budget (for example administrative expenses will normally not exceed a given percentage of investment income of the fund). Management should also routinely review processes for payout to insured depositors to be sure that all modern payment systems are incorporated in their planning for a payout, including the budgeting for such payouts.


This section addresses the issues affecting a deposit insurer associated with crisis management and resolution. It is designed to offer general guidance on such issues as well as to provide some examples of documents that should be part of a deposit insurer’s toolkit to guide its work.


Core Principle 6 addresses the role of the deposit insurer in contingency planning and crisis management:

A deposit insurer should develop procedures and documents to guide its ongoing work processes such as collection of data, assessment of premiums, dissemination of information about the deposit insurance scheme and other routine matters. As discussed above, it should also engage in contingency planning on an ongoing basis and will have in place a BCP that will guide it in a situation where business processes are interrupted by events including natural disasters or manmade events such as power outages. However, during a financial crisis there may need to be additional processes in place as well as prepared guidance on how the deposit insurer will respond to the crisis as part of the financial safety net both for the public and for use by all members of the crisis response team. Such processes should be guided by a crisis management playbook that sets forth the responsibilities of the deposit insurer in a financial crisis and provide guidance as to how those responsibilities will be handled, as well as Memoranda of Understanding signed by key players in the financial safety net. The deposit insurer should have comprehensive plans in place for executing a payout including all the operational pre-positioning for such execution such as access to depositor files and secure portals between itself and its member institutions for data transmission on a real time basis. There should also be a plan for how the deposit insurer will execute its role (if any) in completing a resolution action such as a purchase and assumption transaction.

Some examples of what should be addressed in a playbook are how to retain needed temporary help, how to develop needed communication tools such as relevant press releases and Frequently Asked Questions (FAQs), what type of governance structure for crisis management will be in place (for example will there be a Crisis Management Committee established within the organization and if so how will it be staffed), how will delegations of authority work in a crisis (standard delegations may need to be modified to deal with the greater demands on the organization during a crisis), how will public procurement issues affect the deposit insurer’s preparations, identification of additional expenses that may be incurred and how will such expenses be managed (will the budget process be modified in any way to address additional spending needs in a crisis such as the payment of greater overtime to staff) and how will coordination with other members of the financial safety net or the government as a whole be managed. See Outline of a Crisis Management Plan, Appendix 13.7. The plan can be tested by the use of crisis simulation exercises conducted in coordination with other members of the safety net.


Addressing a financial sector crisis is not the job of only one member of the financial safety net or the government. Management of such a crisis requires detailed analysis, often in a short period of time, of substantial, often complex data about the interactions of various parts of a country’s financial system. For that reason, it is good practice to have in place a forum for relevant regulators and government representatives such as the Minister of Finance for the exchange of ideas and information on a regular basis as well as the sharing of information during a crisis situation. Establishing an interagency dialogue on financial stability in normal times can significantly contribute to better interagency coordination in crisis situations. The work program of such a committee can focus on microprudential issues such as regulation and supervision of financial groups, alignment of regulatory frameworks, the routine exchange of relevant information and capacity building, macroprudential issues including the timely detection and mitigation of risks for the entire financial system and systemic crisis management (once such a crisis is declared).

Participants in such a crisis committee should not only include the Ministry of Finance but also the Central Bank, the Supervisory Authority (if separate from or even as a separate division within the Central Bank), the deposit insurer and any regulators for the securities and pensions sectors if significant in the financial sector. Other parties can be asked to participate in Committee meetings to bring additional perspectives to the dialogue or to provide additional expertise.

The committee can be established by legislation or regulation or even through the signing of a Memorandum of Understanding. [An example of a Financial Crisis Committee Operational Memorandum can be found in Appendix 14.14].


A company may go into insolvency proceedings and its assets will be marshalled by a bankruptcy judge or practitioner to pay the creditors of the insolvent firm to the extent assets are available. As the assets are liquidated, creditors of the firm are paid in priority order in accordance with the law governing insolvency proceedings. Administrative claims, claims for wages, tax claims, secured claims, claims of general creditors and finally shareholders will be paid either in full if possible or only to the extent assets are not exhausted by the payment of higher priority claims.

The hierarchy of claims in liquidation for financial institutions is usually different than the general priority followed in bankruptcy proceedings because of the need to address the priority of depositors’ claims, both insured and uninsured. The ranking of the deposit insurer’s claims and how such claims are defined has a direct impact on the required funding for the deposit insurer and also may impact the behavior of senior creditors as a financial institution is perceived to be experiencing financial difficulties. There is also the possibility that a financial institution has outstanding advances from the Central Bank which may be given the highest priority for recovery on the institution’s assets to avoid putting the balance sheet of the Central Bank at risk, thereby lessening the funds available for the reimbursement of a deposit insurer’s payments.

The priority of claims is often contained in a country’s banking law or, if there is a separate law governing bank resolution it can often be found there. Less often such a priority of claims can be set forth in the deposit insurance law. Wherever it is found it should clearly set forth which claims will take priority on the proceeds of a liquidation action, which must then be followed in completing resolution actions so as not to create preferences for creditors.

The priority scheme in place has a real impact on what could happen as a financial institution approaches insolvency. Sophisticated market players may have made secured loans to such an institution and may call such loans or begin to realize upon their collateral which can have a serious impact on the already-stressed institution’s balance sheet if no priority for secured claims is provided in liquidation. As stated above, the Central Bank may also have extended secured loans to the troubled institution.

There should also be a provision for the payment of liquidation expenses as an administrative claim. Without a priority of payment of liquidation expenses, it will be difficult if not impossible to have a party other than the government act as liquidator. As discussed above, careful consideration should be given to whether secured creditors should be able to satisfy their claims either outside of the priority scheme or as a first priority, to the extent of their security.

The issue of the appropriate priority for the claims of insured and uninsured depositors involves important policy issues and should be the subject of a robust discussion and a weighing of the pros and cons of the different choices that can be made in this regard. There are various types of depositor preference that can be adopted as part of the bank resolution framework. Full depositor preference gives a priority over other creditors for all depositors, both insured and uninsured. With no depositor preference, depositors (and the deposit insurer to the extent of its subrogation) share in the recoveries from the liquidation with other creditors (usually general creditors) pro rata. Insured depositor preference allows the deposit insurer to recover to the extent of its subrogation before uninsured depositors, thereby making it more likely that it will largely or fully recover its cost for providing deposit insurance.42

The priority scheme also has a significant effect on whether the deposit insurer’s funds will be available to be used to facilitate a resolution (see Core Principle 9, Sources and Uses of Funds). To the extent there is no priority for secured claims it may make the need for a contribution to a resolution by the deposit insurer less likely, thereby shifting at least part of the cost of resolution to any secured creditors left at the time of a bank’s failure. This is so because the deposit insurer would in most liquidations incur no or a small cost for its payment of insured deposits if it has a high priority in the ranking of claims and more money would be available in the liquidation because secured creditors would not first recover from the estate to the extent of their security. If the measure of the contribution the deposit insurer makes to a resolution is what its cost would be to complete a payout (see discussion under Funding of Resolution) then a high priority for recovery of the deposit insurer’s payment of insured claims corresponds to a lower contribution amount for resolution.


In the absence of a specific law governing bank resolution, upon the failure of an insured bank the disposition of the failed-bank’s assets and liabilities is determined by bankruptcy law in the jurisdiction and any bilateral arrangements made for cross-border claims. Bankruptcy law, as applied to personal and corporate bankruptcy, can result in a lengthy period before claims are resolved.

This has proven to be ill suited to the resolution of bank failures since a drawn-out failure-resolution process can pose significant financial hardship on commercial and consumer depositors who depend on deposit accounts for day-to-day transactions. Nascent deposit insurance systems may have to rely on existing bankruptcy law; however, separate bankruptcy laws for banks that allows for more immediate payment to insured depositors is preferred.

From the deposit insurer’s perspective, there are two important considerations regarding the priority of claims in a failed-bank receivership. The first is the priority of insured depositor claims in the receivership since this is the deposit insurer’s subrogated claim on the receivership. The higher the priority of insured depositor claims in receiverships, the greater the insurer’s share of recoveries from failed-bank asset liquidations and failed-bank franchise sales. In many jurisdictions, recoveries from failed-bank receiverships are extremely small, due to a combination of delays in bank insolvency determination, poorly designed bankruptcy laws, poor enforcement of contractual obligations by the court system and a lack of legal protections for government officials responsible for closing insolvent banks. The second consideration is how receivership expenses are defined and prioritized as claims against the receivership. Typically, receivership expenses, both internal expenses and external (contractor fees), receive priority over all other receivership claimants. This high priority makes sense from an operational standpoint since receivership expenses would eventually exhaust insurer capital should these expenses be effectively non-reimbursable due to low priority in receivership claims.

The deposit insurer’s claim on receivership recoveries is determined by the proportion of insured deposits-to-total deposits under depositor preference law or proportion of insured deposits-to-total liabilities without depositor preference. Clearly, as changes to the treatment of insured deposits in the receivership claims process are made there is a substantial impact on the likelihood that one will recover enough proceeds from the receivership to cover insured depositor claims, i.e., the insurer will incur a small or no loss.

The recoupment of deposit insurer funds after liquidation may also depend on creating a legal environment that allows for an expeditious recovery process. There are ways to simplify the liquidation process by allowing for determinations of no-asset receiverships or permitting notice of the abandonment of claims that might be too costly or time-consuming to pursue. These are areas that may require changes in the law governing bank liquidation procedures.


Core Principle 9 addresses a number of issues relating to funding for the deposit insurer 46 but for purposes of the discussion on the appropriate measure of a deposit insurer’s contribution to resolution the relevant Essential Criteria is number 8:

Implementation of these rules will require close cooperation between the bank regulator, the deposit insurer and the resolution authority in determining not only the level of the contribution of the deposit insurer to a resolution but also whether that contribution can be made under the legal framework in place. The board of the deposit insurer must authorize the use of its funds and the amount to be contributed. This will require not only the sharing of relevant information about the losses at the targeted financial institution but also the likely recoveries that would have been realized if the institution had been liquidated. It will also require cooperation between the deposit insurer and the resolution authority if there is a requirement that resolution actions must meet a least cost test. All of these matters can be governed by a cooperation agreement between the deposit insurer and the relevant authorities (i.e., supervisor and resolution authority) (see attached cooperation agreements, Appendices 14.5 and 14.6).


Core Principle 16 sets forth the requirement that the law address the need for the deposit insurer to recover the funds it advances for the payment of insured deposits:

Importantly this Core Principle does not specifically address how the hierarchy of claims should be designed (discussed above) nor does it make clear that the deposit insurer’s costs should also be recovered either as an administrative expense or as part of the subrogated claim for its payment of insured deposits. The choice of how such costs will be recovered will of course have an impact on the deposit insurer’s funding and also how much it can contribute to resolution.


Every public and private sector organization has a structure comprised of rules, roles and responsibilities that drive the organization’s activities. An organization’s structure can be very simple, e.g., an organizational hierarchy that determines who does what and when. Organizational design is used to make choices about the workflow of an organization that are not driven by organizational structure. A deposit insurer’s structure is determined by the laws and regulations that establish the deposit insurer, determine its powers and responsibilities, as well as its financing—sources and uses of funds. Depending on the rigidity of the structure, deposit insurers are able to make design choices.


We begin this discussion of deposit insurance premiums by comparing insurance premium setting for commercial and consumer insurance (e.g., property, casualty and life insurance) with deposit insurance premium setting practices. We believe a review of the similarities (dissimilarities) in premium setting practices for commercial and consumer insurers compared to deposit insurers, and the reasons for those similarities (dissimilarities), can assist in understanding deposit insurers’ unique situation.


Business and personal insurance premiums are charged over the life of the insurance contract and are collected prior to insurance claims. These Insurers seek to collect sufficient premiums to cover expected losses due to claims, as well as operating costs, and return a profit. Expected insurance losses (L) over the life of the contract (T) are typically modelled as the product of the expected average loss per claim (severity, or lifetime losses divided by expected number of claims, L/N) and expected number of claims (N) over the life of the contract (frequency, N/T), as shown in equation 1:


Commercial and consumer insurers assume that claim frequency and severity follow known probability distributions and are distributed independently of one another. The claim frequency is typically assumed to follow a Poisson distribution where the vast majority of insured entities (businesses or individuals) do not file claims over a given period (exposure) and the frequency distribution of the number of claims per insured entity is highly skewed toward the left. To predict claim frequency insurers have used generalized linear models (GLM) with a Poisson link function. The frequency distribution of claim severities is also skewed to the left and is often assumed to follow a gamma distribution. The gamma distribution results from processes where the interval between events is meaningful and events (e.g., claims) follow a Poisson process. To predict claim severity insurers have used generalized linear models (GLM) with a gamma link function. In recent years, insurers have used machine learning methods, such as decision tree methods, to model claim frequency and severity. The dependent variables in these models are measures of claim frequency and severity and the explanatory variables are measures correlated with claim frequency and severity. Explanatory variables include attributes of the insurer entity and the property that is insured.


Deposit insurers incur losses when a bank fails, i.e., becomes insolvent. The extent of deposit insurer losses depends on several factors. First, failed-bank receiverships typically charge all expenses associated with managing the receivership and liquidating assets to the receivership. As a consequence, only the net proceeds of the receivership (gross recoveries minus expenses) are available to reimburse receivership claimants. Insured deposit reimbursement is typically not considered a receivership expense. Second, the priority that insured depositors have in the claims process affects how much of bank-failure resolution costs the insurer might recover from the receivership as the insurer’s subrogated claim on the receivership is based on insured deposits. Secured liabilities may have first claim on the net receivership recoveries and should the jurisdiction have enacted depositor preference laws all depositors have second claim on net receivership recoveries. Under depositor preference, the insurer’s claim on net recoveries, after secured claims, is determined by the ratio of insured deposits-to-total deposits, as shown in equations 2, 3 and 4.


The deposit insurer’s share of net recoveries can vary substantially across banks depending on the level of insured deposits. If depositor preference laws have not been enacted, the deposit insurer’s share of net recoveries is determined by the ratio of insured deposits-to-total liabilities, net of secured liabilities if given preference, and that share is typically much less than the share under depositor preference.

As is the case with commercial and consumer insurance, deposit insurers typically model losses by separately considering three components of loss—probability of bank failure, loss rate on exposure given failure and insurer exposure at time of failure (insured deposits)—using a credit risk model approach based on Merton [20]. Merton models a firm financed with a single bond and equity. Merton argues bond holders have a call option on the firm’s assets that can be exercised when the market value of its assets is less than that of liabilities (the bond), implying the firm fails. In the Merton model bank default is synonymous with bank bankruptcy, hence we use the terms default and failure interchangeably in this document. Under the credit risk model approach, the expected loss to the deposit insurer from the default of bank k at time t is the product of the bank’s probability of default (PD), insurer loss given default (LGD) and insurer exposure at time of default (EAD), as shown for failed bank k in equation 5: