How do countries safeguard depositors' money when banks like SVB collapse?

Find out how governments and central banks ensure that the depositors' money is protected in case of fallout, like Silicon Valley Bank (SVB) here

The fallout of the Silicon Valley Bank (SVB) has once again brought forth the matter of the safety of depositors' money in banks. Before shutting down last week, the bank had deposits worth $175 billion. This makes it the biggest bank to collapse in US history since Washington Mutual Bank's fall in 2008.

To protect the investors' money during any such fallout, governments and central banks worldwide offer deposit insurance.  

What is deposit insurance?

Deposit Insurance is the cover provided to deposit holders in a bank when it falls and does not have enough money to pay back the depositors. It is provided, so the depositors do not lose all their money during a crisis.

Different countries have different bodies that handle this insurance. The USA was the first country to introduce this way back in 1933. Interestingly, India was the second country to launch it in 1962.

Deposit insurance in the US

In the USA, Deposit Insurance comes under the ambit of the Federal Deposit Insurance Corporation (FDIC). The banks have to get registered under the FDIC, which protects deposits up to $250,000 per depositor per insured bank.

In the case of SVB, reports suggested that 93 per cent of deposits were uninsured. But on Sunday, the Joe Biden administration said that the resolution of the bank would be done in a manner that protects all the depositors, and they will get access to "all of their money" from Monday.

Deposit Insurance in India

In India, insurance cover is provided on deposits up to Rs 5 lakh. Before February 2020, this was Rs 1 lakh. The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides the deposit insurance here.

All the deposits, like savings, fixed and current, are insured under the scheme. And all the commercial banks and cooperative banks are insured by DICGC.

What if my deposit is above Rs 5 lakh?

If the deposit in a bank account is higher than Rs 5 lakh, the deposit holder is only liable to get Rs 5 lakh. They will not get the excess amount. But, if they have two different accounts in the same bank, the Rs 5 lakh limit will be applied to both accounts separately.