About Deposit Guarantee
Protecting the deposits of small depositors against losses caused by bankruptcy of banks and credit institutions is one of the mechanisms to promote the stability of the banking system of each country which is done by creation of deposit guarantee/insurance fund. Deposit insurance fund is one of the complementary elements of financial security extensive network of each country. Other elements of this network include bank rules and regulations, banking supervision system and the central Bank as the last supplier. Most of the countries consider the deposit insurance system as the most important and most essential way to deal with financial crisis.
Deposit insurance fund provides the ground for consolidation and continuation of financial stability in the country by protecting the financial system against bank run and assuring the small depositors about security and liquidity of their deposits. This is the main goal of public policy of creating the system of deposit insurance.
In the absence of a systematic plan for protecting public deposits, governments often rush to help bankrupt financial institutions and bear the cost of crisis arising from the institutions' forcible risks and mismanagement in order to avoid the social costs. It is obvious that decision making to cover the costs of the crisis arising from the forcible risks is one of the government decisions which will be distributed fairly in the case of payment. Covering the costs caused by institutions' mismanagement creates inequalities. In fact, the costs which should be paid by owners of financial institution due to selecting non-specialist managers will be paid by governments and central bank. It will waste public resources. Therefore, the presence of an organized program in the form of an institution which has the authorities to regulate the financial system through developing the rules, supervising and continuous assessing is essential. Having adequate control measures such as applying the fines, limiting the activities of delinquent institution and equipping the required financial resources to repay the public deposits of bankrupt institution, this institution serves as the power supervisor of financial rules. It also creates, develops and strengthens the secured financial network in the country. It is important to emphasize that a deposit insurance system cannot protect the banking system singly. Other elements such as a strong banking supervision and legislation system and a sponsor in stature of last creditor (the effective role of the central bank) are required as the sides of a triangle which are in close cooperation with each other. Accordingly, studying the history of the creation of insurance funds in the world indicates that governments and central banks allow the powerless banks to declare their bankruptcy exactly after the formation of such an institution. This is the matter which made them worried in the past and cost a lot of public property.
Deposit guarantee institutions are formed as an independent entity, a part of the central bank, a private institution with governmental support or in the form of a completely private character. This institution insures the deposits, supervises their performance and evaluates them through receiving membership fees from credit institutions and banks. In case of crisis, it helps banks, financial institutions and depositors.