Deposit guarantee schemes are separated and independent funds whose members protect account holders from default of one of the members. Contributions and premiums are paid by the members to the fund to ensure a hefty guarantee fund so that payments to eligible creditors can be made without delay.
Participation in a deposit guarantee scheme is compulsory for supervised credit institutions. Their license to operate is often connected to such participation. Even though the financial system is safe and secure, and regulators impose several capital requirements on financial institutions that operate in their market, failure and systemic collapse is unlikely but cannot be ruled out.
Contrary to regulatory insurance, participation in deposit guarantee schemes is limited to supervised deposit taking and credit institutions, mostly banks. The mandate of the fund is derived from local laws and the administration appointed by the Ministry of Finance, Central Bank or other regulator. Depending on the jurisdiction and the size of the local financial sector, representatives of the participating financial institutions may also have a seat in the board of the scheme.
Administrative tasks of the scheme include the information provisioning of the applicability of the fund, the announcement of the activation of the scheme in relation to a failed member institution, and the administrative procedures to verify and repay eligible deposits. The fund acts as a paybox function and repays eligible and insured deposits. Upon repayment, the scheme receives the claim for the insured balance from the client and submits the aggregated claim of all eligible repayments to the liquidator during the bank liquidation procedures.
The responsibilities of the scheme are defined in local regulation. This limited scope of activities justifies indirect employment. Daily operations are often governed and executed by a central bank, ministry of finance or other regulator. A management board, accountable to the minister of finance is in control of the scheme. The board appoints the members of the scheme who receive remuneration on a flexible basis.