Deposit protection to discourage excessive risk-taking

Aside from part of the effort to cushion depositors in the instance of a collapse of any financial institution, the Ghana Deposit Protection Scheme will discourage excessive risk-taking by banks or their beneficiaries.

Across the world, a well-designed deposit protection scheme can discourage or mitigate moral hazard by avoiding 100 percent deposit protection. Indeed, the Scheme in Ghana seeks to cover only 95 percent of depositors of banks and Specialized Deposit-Taking Institutions (SDIs).

Speaking at the 2019 IADI Africa Regional Committee Technical Assistance Workshop, the Governor of the Bank of Ghana, Dr. Ernest Addison noted that, the absence of a deposit insurance scheme in the midst of bank failures could impose enormous strain on fiscal policy management.

“In the absence of an effective scheme, as has been the case in Ghana until now, the failure of banks and specialized deposit-taking institutions would suddenly place an enormous burden on taxpayers’, as the Government would be compelled to finance pay-outs to depositors in an attempt to forestall the potential for a bank-run and help contain threats to financial stability,” Dr. Addison said.

The scheme in Ghana has seed funding from the government and the central bank, as well as initial and annual premiums paid by the member banks and SDIs, and emergency funding arrangements. Members to the scheme are expected to regularly contribute to the scheme in advance to any bank failures, rather than after.

The initial premium is a one-off premium of 0.1 percent of required minimum paid-up capital, whereas the annual premium is at 0.3 percent of the insurable deposits.

The coverage limits for the scheme is GHc 6,250.00 per customer per bank and GHc 1,250 per customer per SDI.

Dr. Addison said, “the establishment of GDPC, therefore, comes as a big relief and welcome addition to Ghana’s financial safety net apparatus, as it puts the nation in a state of readiness to better manage the failure of banks and deposit-taking financial institutions in the future.”