Bermuda To Introduce Bank Deposit Guarantees
Friday, September 17, 2010
The Bermuda Monetary Authority (BMA) has launched a consultation on proposals for introducing
deposit insurance in Bermuda.
The Paper outlines key recommendations for establishing a so-called Deposit
Insurance Scheme (DIS) for Bermuda’s banking sector, particularly designed
to protect small depositors. A DIS provides enhanced protection to depositors
in a bank by guaranteeing that they will be compensated up to a maximum specified
amount of their deposits upon failure of that institution.
The issue of depositor protection has received heightened attention internationally
due to the significant losses some banks incurred during the global financial
crisis. As a result, regulatory authorities around the world have been examining
their standards with a view to strengthening their banking sectors. While, according to the BMA, Bermuda’s
banking sector remained resilient overall during the crisis, and continues to
be stable, a DIS would be introduced as a precautionary measure to provide an
additional safeguard particularly for small depositors.
Jeremy Cox, CEO of the Authority said: “As Bermuda’s financial
services regulator, one of our most important responsibilities is deposit-holder
protection. Traditionally, we have relied on prudent and effective supervision
of the banking sector, ensuring that Bermuda banks operate within strict levels
of solvency and liquidity. This approach has served Bermuda well, however the
challenges presented by the global financial crisis highlighted the potential
enhanced protection offered by a DIS, and the benefits of having such a facility
in place. The addition of a DIS in Bermuda will further strengthen the financial
safety net for retail depositors in our market.”
The consultation paper sets out the objectives, rationale and proposed features
of the DIS. The objectives of the DIS are to protect small depositors, to promote
stability in Bermuda’s financial system and economy, and to promote competition
within the banking sector. The consultation paper presents proposals for, among
other matters, the structure and administration of the DIS, the scope and amount
of its coverage and funding of the Scheme.
Graeme Dargie, Director, Banking, Trust and Investment at the Authority, added:
“The Authority conducted extensive research to develop a DIS that would
be both practical for the Bermuda market, and consistent with international
best practice. The paper outlines twelve recommendations regarding the structure
and key features of a DIS in Bermuda, which are designed to ensure it is prudently
One of the features proposed in the paper is a maximum coverage amount of BMD25,000 (USD25,000)
per depositor, per institution. This means that in the event of a local bank
failure, individuals with bank accounts with that institution would be reimbursed
for all their deposits combined up to a maximum of BMD25,000.
Dargie continued: “In developing the maximum coverage amount, the Authority
had to balance the issues of enhancing financial stability in the marketplace
with the need to keep the funding costs of the scheme within reasonable levels.
The cost of the scheme and how it will be funded remains a key discussion point
within our consultation with the market. The formula proposed by the Authority
to determine the coverage amount was based on a recommendation by the International
Monetary Fund and is consistent with international best practice. In addition,
it would meet one of the objectives of the DIS by covering the vast majority
of small depositors on the island.”
“It is important to note as well that the Authority’s recommendation
to set the maximum coverage amount at BMD25,000 is a starting point to establish
the scheme. This amount can and should be reviewed periodically to ensure it
Additional highlights of the proposed DIS include:
- Mandatory contributions (premiums) into the Scheme by all banks and deposit
companies licensed under the Banks and Deposit Companies Act 1999. Compulsory
participation is an internationally adopted practice that promotes comprehensive
protection for depositors;
- Coverage for “retail deposits” only. The BMA said this is "in line with the
objective to protect small depositors and would include deposits owned by
individuals, trusts, small businesses and charitable organisations"; and,
- Establishing a separate statutory body, the Bermuda Deposit Insurance Corporation
(BDIC), to institute and manage the scheme. The BDIC would not duplicate the
supervisory role of the Authority. Its main responsibilities would involve
such functions as premium collection, assessing claims and compensation payouts.
The BDIC would also be responsible for reviewing the maximum coverage amount
of the scheme in consultation with the market, if deemed necessary.