The need for deposit insurance is due to the frequent bankruptcies of banking institutions. The system is aimed at compensating for lost savings of depositors, as well as for losses of the banks themselves. Despite the fact that the need for such a system is obvious, it operates only in 70 countries of the world, and in some countries preparations are underway to implement it. In China, for example, compulsory deposit insurance began to operate in 2015. But the United States is the home of the system.
How does the system work in the United States?
The global economic crisis of the 1930s and the Great Depression in the U.S. necessitated bank deposit insurance. Before 1933, more than 1/3 of credit institutions in America went bankrupt. In some cases this happened because depositors, who had lost confidence, all at once withdrew their savings deposited with the banks. This phenomenon became known as “bank runs” or “bank raids.”
The Federal Deposit Insurance Corporation and the Federal Savings and Loan Association Deposit Insurance Corporation were created to regulate the system. In 1989 the two bodies were merged into one, the FDIC. This body is independent (it cannot be influenced by commercial and other banking institutions) and reports only to the U.S. Congress. The FDIC covers virtually 100% of all government deposits and assets.
Characteristic features of the U.S. deposit insurance system include:
– Creation of an insurance fund;
– Cooperation of the FDIC with government oversight bodies;
– Availability of financial support from the state;
– The insurance principle of depositor protection;
– Flexibility of the system;
– Participation of a large number of banks in the system.
The laws and regulations governing the system require all banks to make an annual insurance contribution of 0.08% of the total annual deposits, as well as from each insured account over $100,000. The state then does not fund the system, but the FDIC has the right to request a government loan of up to $500 billion at any critical time.
The main piece of legislation that defined the face of the American banking system from its signing until the end of the twentieth century was the Glass-Steagall Act. This federal legislative act was signed by the president of the state on June 16, 1933, and its initiators were senator from Virginia Carter Glass and congressman from Alabama Henry B. Stigoll.
The main provisions of the law included the following points:
– Creation of a supervisory authority, the FDIC;
– Mandatory bank deposit insurance;
– Prohibition of commercial banks from conducting and conducting securities transactions;
– Prohibition of the establishment of branches of banks engaged in securities transactions;
– Prohibiting securities companies from engaging in traditional banking activities;
– Prohibiting citizens from combining positions in investment and banking organizations.
This legislative act had a great influence on the development of banking legislation in other countries. In fact, it split such notions as investment and commercial bank, which were combined during the crisis and caused colossal losses.
Decades later, namely in 1999, the restrictions imposed by the Glass-Steagall Act were lifted with the Gramm-Leach-Bliley Act. This act was passed because by the mid-1980s it had become apparent that the provisions of the previous law were in fact no longer working. The new law expanded the possibilities of creating and operating financial conglomerates, which could be the owners of both investment and commercial banks, as well as insurance companies.