Introduction to Deposit Insurance

It might come as a surprise to some Singaporeans that, until recently, their deposits in banks and finance companies were not insured.

Singaporeans take for granted that their savings will be completely safe as the financial system here is widely seen to be well-regulated and well-managed.

Their faith in the system is understandable. But it does not take into account the changing global financial landscape.

While our banking system remains sound, things can go wrong in today's complex and globalised environment.

International experience has shown that banks can fail and depositors can lose their savings even in reputable and well- supervised jurisdictions.

Although Singapore has not had a bank failure, there is no guarantee that a bank failure will never occur.

In a bank failure, ordinary depositors may suffer the loss of their core savings. These are the funds they need to get on with their daily living — money to pay for groceries, school fees, utilities, phone bills et cetera, before the next pay cheque comes in.

Since April 1 2007, this risk has been mitigated with the introduction of deposit insurance.

The Deposit Insurance Scheme protects customers of full banks or finance companies by insuring their deposits for up to $20,000 net of liabilities.

The deposits must be in Singapore dollars and maintained with branch offices of full banks and finance companies in Singapore.

The effect of netting means that any loan owing to a failed bank or finance company by a customer is offset against the amount of deposits belonging to the same customer before deposit insurance is paid out.

Suppose you have $35,000 in your savings account and a $20,000 outstanding car loan with the same bank. Your net deposit with the bank after offsetting the loan amount is $15,000.

This $15,000 net deposit is insured under deposit insurance.

Now, if you have $35,000 in your savings accounts and a $10,000 loan with the bank, the amount insured is capped at $20,000 although the deposit net of liability with the bank is $25,000.

It is also worth noting that deposits are not insured separately in each branch office of a bank or finance company.

This means that all your eligible accounts maintained with different branches of a bank or finance company are aggregated and insured up to $20,000 net of your liabilities to the same bank or finance company.

Money held in bank deposits under the CPF Investment Scheme are separately insured up to $20,000.

The $20,000 is a figure based on studies that show that the amount will cover a majority of depositors from losses on their insured accounts should their bank or finance company fail.

Not all deposits or bank products are, however, covered by deposit insurance.

Only those in Singapore dollars placed in savings accounts, fixed deposits, current accounts and deposits under the CPF Investment Scheme are covered.

Foreign currency deposits, structured deposits and investment products like shares, unit trusts are excluded. This is because these products carry higher risks and those who buy them should be prepared to assume the higher risks for the potentially higher rewards.

With banks and finance companies constantly creating new products, it can be hard to know which deposits are covered by deposit insurance and which are not.

An easy way to get such information is to go to a bank's website or any of its branches and ask for its register of insured products.

Since Oct 1 2006, banks and finance companies have also been required to disclose in their deposit account statements, account opening forms and marketing materials if they are offering insured products.

The Singapore Deposit Insurance Corporation (SDIC) administers the deposit insurance scheme in Singapore.

More information on deposit insurance and the SDIC can be found at the SDIC website (www.sdic.org.sg ).

This information is provided by the SDIC and the Monetary Authority of Singapore as part of the MoneySENSE national financial education programme.