Risk-Based Deposit Insurance

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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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  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. Canadian Deposit Insurance Corporation ...

    A crown corporation owned by the Canadian government that insures ...
  6. Moral Hazard

    The risk that a party to a transaction has not entered into the ...
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