Depository institutions are institutions that receive deposits from customers and offer other services like loans, mortgages and financial transfers among others. Depository institutions can be classified into three major categories and these are commercial banks, savings banks and credit unions (Perdichizzi, 2017; Malloy, 2018). These three institutions operating at different levels receive money from the clients in form of deposits and in return offer interest rates on the money received from the consumers. Given that these institutions receive deposits from the customers and offers loans, the customers should be assured some level of security in case of a financial crisis or the bank has failed. This security is provided by the depository insurance scheme provided by the government. It covers the domestic banks and this has an impact on the customers of foreign banks and the business. The current depository insurance regulations are not favorable for foreign banks branches and branches of domestic banks abroad.
Commercial banks
The commercial banks exist for the sole purpose of making a profit for the shareholders. Besides making a profit the commercial banks also provide credits, loans, and mortgages to the consumers (Malloy, 2018). The commercial banks are regulated by charters provided by the federal and state governments. The commercial banks are therefore required to operate under the charters and failure to fulfill the requirements under the charters they are closed by the order of the state or federal government under which the commercial bank is operating. The commercial banks are entitled to the federal insurance and are a member of the federal reserve systems receiving the insurance fund through the Bank Insurance Fund (BIF)) (Malloy, 2018).
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Saving banks
Saving banks are also known as savings and loans institutions. The regulation of these institutions can fall under mutual regulation or ownership and stock ownership. Stock ownership is regulation through shareholdings while mutual ownership is done through borrowers and the depositors (Malloy, 2018). These institutions also receive their chatter through the state or federal government and are required to have 65% assets in housing or related assets to maintain this charter (Malloy, 2018). Lastly, the BIF and the Savings Association Insurance Fund (SAIF) also indemnifies the saving banks.
Credit unions
Credit unions are cooperative because persons with common interests such as same church membership, locality, and working under the same employer or some shared attributes form them. The membership of these unions is restricted strictly to those persons that formed the group (Malloy, 2018). These institutions receive deposits and offer loans and are exempted from taxation. The federal and the state governments charter credit unions while the National Credit Union Insurance Fund (NCUI) insures them.
Commercial banks, savings banks, and the credit unions receive insurance from the government. The depository insurance fund is very important in moments of financial crisis as it helps to minimize the risk of complete loss by the consumers in such moments in case a bank fails to pay its customers or the amount available is not sufficient (Demirgüç-Kunt, Kane & Laeven, 2014). The analysis also helps in drawing a conclusion that the government offers insurance for local financial institutions but how about foreign institutions? Looking into the case of Iceland financial crisis during which the Icelandic DIS failed to honor, initially, its cover of foreign branches offers an important lesson. In the European economic area (EAA) countries, the insurance of the branches of a bank is covered by the EAA scheme neglecting those of the non-EAA banks (Demirgüç-Kunt, Kane & Laeven, 2014). In the United States and the European Union, the regulations on depository insurance only guarantee insurance on domestic branches while neglecting foreign branches (Reuters, 2013).
Whereas a depository insurance fund covers a bank locally, its foreign branches may not be covered by the DIS and this places its foreign customers under great risk in case of a bank failure. Considering that financial crisis can occur under unavoidable circumstances, consumers care less about whether the depository insurance scheme covers a local or foreign bank. The United States failure to guarantee explicit depository insurance should be reviewed as this affects business and financial security to the customers.
Case
The economic growth of the country and the globe depends on financial security. Fear for loss in banking system affects the economic growth by discouraging financial deposits in the bank and other depository institutions and the provision of loans. Moreover, financial insecurity affects the business formation and indicates economic growth. For example, in the 1907 panic, the US witnessed a great shift of customers shifting from trusts to national banks and it is recorded that only six of the 6000 national banks then failed ( Demirguc-Kunt, Kane, Karacaovali & Laeven, 2008 ). Such a panic is not healthy for economic growth and necessary amendments should be done to provide for depository insurance for both domestic and foreign branches. The citizens should feel secure that their money is safe and that they are protected from any financial crisis by the depository insurance fund. Therefore, it is sufficient to provide domestic insurance for the local financial institutions like the commercial banks, credit facilities, and the saving banks but this insurance should be extended to branches that are abroad and foreign branches within the US should also liaise with the government to ensure that depository insurance is provided.
Conclusion
Depository insurance is important in the banking system as it provides a level of security and confidence in the customers and cushions them in case of a bank collapse. The government should modify its regulations and extend the insurance scheme to branches of US banks in foreign countries and cooperate with branches of foreign banks in the US to provide the insurance scheme. The advancement will improve customer trust and increase economic development as well.
References
Demirguc-Kunt, A., Kane, E., Karacaovali, B., & Laeven, L. (2008). 11 Deposit Insurance around the World: A Comprehensive Database. Deposit insurance around the world: Issues of design and implementation. Open Knowledge Repository . Retrieved Jun. 20 3018 from http://hdl.handle.net/10986/8226
Demirguc-Kunt, A., Kane, E., & Laeven, L. (2014). Deposit Insurance Database. Retrieved Jun. 20 3018 from https://www.imf.org/external/pubs/ft/wp/2014/wp14118.pdf
Perdichizzi S. (2017). Economics of Financial Intermediation. Retrieved Jun. 20 3018 from https://core.ac.uk/download/pdf/80589791.pdf
Malloy, D. P. (2018). Banks, Thrifts, and Credit Unions - What's the Difference? Retrieved Jun. 20 3018 from http://www.ct.gov/dob/cwp/view.asp?a=2235&q=297886
Reuters. (2013). U.S. FDIC says foreign deposits not eligible for deposit insurance. Reuters. Retrieved Jun. 20 3018 from http://www.reuters.com/article/2013/09/10/us-financial-regulation-deposits-idUSBRE9890RX20130910
