Risk-Based Deposit Insurance


DEFINITION of 'Risk-Based Deposit Insurance'

Deposit insurance with premiums that reflect how prudently banks behave when investing their customers' deposits. The idea is that flat-rate deposit insurance shelters banks from their true level of risk-taking and encourages poor decision-making and moral hazard. Although not all bank failures are the result of moral hazard, risk-based deposit insurance is thought to prevent bank failures. Banks that have a higher risk exposure pay higher insurance premiums.

BREAKING DOWN 'Risk-Based Deposit Insurance'

The Federal Deposit Insurance Corporation (FDIC) Improvement Act of 1991, passed in the aftermath of the Savings and Loan crisis, required the FDIC to switch from a flat-rate deposit insurance program to a risk-based deposit insurance program by 1994 (it actually made the switch on January 1, 1993). The FDIC uses the deposit insurance premiums it collects from banks to fund the Federal Deposit Insurance program. This program protects consumers by insuring deposits of up to $250,000 at member banks in the event of bank failure.

  1. Deposit Insurance Fund - DIF

    A fund that is devoted to insuring the deposits of individuals ...
  2. FDIC Insured Account

    An account that meets the requirements to be covered or insured ...
  3. Insured Financial Institution

    Any bank or savings institution that is covered by some form ...
  4. Federal Deposit Insurance Corporation ...

    The U.S. corporation insuring deposits in the U.S. against bank ...
  5. Moral Hazard

    The risk that a party to a transaction has not entered into the ...
  6. Canadian Deposit Insurance Corporation ...

    A crown corporation owned by the Canadian government that insures ...
Related Articles
  1. Savings

    Are Your Bank Deposits Insured?

    Learn how the FDIC is helping to keep your money in your pockets.
  2. Options & Futures

    9 Tips For Safeguarding Your Accounts

    When it comes to keeping your money safe, don't rely on the FDIC - there's much more you can do.
  3. Home & Auto

    Are My Investments Insured Against Loss?

    Money invested in a brokerage account has some protection, but that doesn't mean you can't lose it.
  4. Retirement

    The History Of The FDIC

    Find out why this corporation was developed and how it protects depositors from bank failure.
  5. Retirement

    CDIC Protects Canadians From Bank Failure

    Bank failures can happen in Canada, but many deposits are insured. Find out what's covered.
  6. Options & Futures

    Bank Failure: Will Your Assets Be Protected?

    The SIPC and FDIC insure against personal financial ruin when banks or brokerages go belly up.
  7. Options & Futures

    Who Backs Up The FDIC?

    The FDIC insures depositors against loss, but what happens if it runs out of money?
  8. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  9. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  10. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  1. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  2. Does renters insurance cover personal injuries?

    Renters insurance provides two main forms of coverage – liability and contents insurance – and they are offered together ... Read Full Answer >>
  3. Are 401ks FDIC insured?

    The Federal Deposit Insurance Corporation (FDIC) works as a protector for customers when banks and financial institutions ... Read Full Answer >>
  4. Does the FDIC cover identity theft?

    When a third party gains access to your bank account and conducts transactions without your consent, the FDIC does not have ... Read Full Answer >>
  5. Does renters insurance cover jewelry?

    Renters insurance provides personal property coverage that covers your personal property – including jewelry – in case of ... Read Full Answer >>
  6. Why might landlords require renters insurance?

    Landlords can require renters insurance to lower their own liability and insurance costs. According to data from the Insurance ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  4. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  5. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  6. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
Trading Center