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What is Bank Insurance?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 28 August 2016
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    Conjecture Corporation
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Bank insurance is an insurance product designed to protect the deposits in a bank. In the event of losses due to bank failures, people with deposits in the bank will not lose their money. Typically, only deposits up to a certain amount are insured and anything over that is liable for losses. Banks are required in some nations to carry insurance for their deposits, and in others, they are strongly encouraged to do so. One of the reasons for this is that consumers tend to seek out banks with insured deposits as they are viewed as more trustworthy.

Both public and private companies can offer bank insurance. Like other insurance products, the cost varies depending on the risk posed. Banks are usually required to maintain minimum deposits to limit losses for insurance companies. The pooled insurance payments from all members of the insurance plan are used to provide compensation in the event of a bank failure, with the understanding that regulatory officials will try to limit the risk of bank failures by intervening at troubled banks, and the same officials will seize assets in a bank failure and use these as a starting base for a pool to compensate people with deposits at the bank, with the bank insurance providing the rest of the money.

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For consumers, bank insurance provides an assurance that if a bank fails, their funds will not be lost. Historically, bank failures resulted in not just a loss for the bank, but also for all customers with money in the bank, as they might only be able to recover a fraction of the funds on deposit, if anything. This undermined consumer confidence in the banking industry and led to the development of bank insurance; creation of this insurance product was also stimulated by events during the Great Depression, when large numbers of bank failures contributed to economic hardships for many people.

Banks must remain current on their insurance payments and they usually post information about the insurance plan they use and the amount of coverage provided. People with concerns can also ask for additional information from officials at the bank. In the event of a bank failure, customers will receive notifications from the insurance company, going over the records and providing information about compensation for their losses. In cases where banks are taken into receivership or taken over, people will also be notified through a mailing so they know who has taken over management of the financial institution. Takeovers are often done during the weekend so they do not disrupt the business week.

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