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The latest events infvolving the Israel Trade Bank Ltd. and the Israel Industrial Development Bank Ltd. once again raise the crucial question: Are people who deposit their money in various banks in Israel, secured against the collapse of the bank or its insolvency? Is it not time to oblige the banks to buy insurance to cover the depositors, which will protect them in the event of the bank’s collapse? Or alternatively, is it not time to enact a law to this effect?
In Israel today there is no such obligation nor does such insurance cover exist, and in fact the depositors are not protected. They only hope that the Bank of Israel will rescue them in such a situation, as it did in the past.
The situation in other western countries is different, and it is interesting to learn what kind of protection is provided in other countries.
In most countries the banks or the government have a legal duty to ensure that insurance coverage is provided against these kinds of risks. In the United States, for instance, there is a Federal Deposit Insurance (FDIC). The FDIC insures any person or entity which deposits money in a financial institute. A depositor does not have to be a U.S. citizen, or even a resident of the U.S. The insurance covers, in event of the failure of the bank, any kind of deposit up to a certain limit. All types of deposits received by the financial institution in its usual course of business are insured, including: savings deposits, checking accounts, certificates of deposit, cashiers’ cheques, officers’ cheques, expense cheques, loan disbursement cheques, interest cheques, outstanding drafts, negotiable instruments, money orders, travellers cheques, letters of credit, etc.
The basic amount which a depositor may insure is $100,000 per person, but deposits maintained in different categories of legal ownership are separately insured, even if the same bank holds them.
Therefore, each individual account holder is entitled to $100,000 and the total insurance coverage with respect of a single account will be a multiple of the basic amount times the number of account holders - and there is no limit. For example, a couple’s mutual account guarantees insurance coverage for $100,000 to each individual, and therefore the total amount guaranteed in such an account would in fact be $200,000.
In England there is a deposit insurance scheme and the banks are members of the Financial Services Compensation Scheme, established under the Financial Services & Markets Act - 2000. The scheme provides a safety net for depositors who placed their money in a bank or similar institution, in case the financial institution goes out of business, or has become insolvent. Deposits are protected under the scheme pro rata to the amount deposited, up to a limit in the region of between GBP30,000 to about GBP40,000. In most cases the cover is limited to GBP31,700 (100% of the first GBP2,000 of the total deposit, and 90% of the next GBP33,000, resulting in a maximum payment of GBP31,700.
However, when the depositor is not an individual, but a company or an investment company, the amount is higher and may reach about GBP48,000. It is interesting to note that the FSCS is an industry-funded body which was set up as a final safety net for customers of financial firms.
Without entering into all the details of the scheme, we would note that deposits in all currencies are treated equally, and that the scheme also covers deposits which are made in foreign offices of the bank located in the E.C. countries.
There is no doubt that the above arrangements are not intended to be a total safety protection for depositors. There are limits to the amounts and to the kinds of deposits which are covered by the above mentioned schemes. The depositors still have some responsibility for their money, where they decide to place it, and what they do with it. However, the described arrangements are intended to provide legal protection for those least able to sustain a loss in the event of the collapse of financial institution.
It seems that this principle, as limited as it might be, is very significant in our times, and should be seriously considered.
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