The Great Depression of the 1930s had a profound impact on the global economy, leading to widespread bank failures and significant losses for depositors. This experience highlighted the vulnerability of depositors and the potential systemic risks associated with bank failures. As a result, policymakers recognized the importance of implementing measures to safeguard depositors and prevent bank runs. The United States was one of the first countries to establish a deposit insurance system. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as a response to the banking crisis during the Great Depression. This initiative aimed to restore public confidence in the banking system and prevent mass withdrawals that could further exacerbate the economic downturn. Many other countries thereafter began to establish their own deposit insurance systems. For example, India established the Deposit Insurance and Credit Guarantee Corporation (DICGC) in 1961. Canada introduced deposit insurance in 1967 with the establishment of the Canada Deposit Insurance Corporation (CDIC) and Japan established its deposit insurance system in 1971 with the Deposit Insurance Corporation of Japan (DICJ).
The Asian financial crisis of 1997-1998 played a significant role in the development and strengthening of deposit insurance systems in many countries. The crisis exposed weaknesses in financial systems, including inadequate depositor protection, which contributed to the loss of confidence in banks and subsequent bank runs. During the crisis, and thereafter, many governments provided blanket guarantees to depositors and other creditors to prevent the financial and payments systems from collapsing.
In November 1999, it prompted the Financial Stability Forum (FSF) – a forum convened by the G7 Finance Ministers and Central Bank Governors to promote international financial stability in the wake of the financial crisis that began in mid-1997 and predecessor of the Financial Stability Board (FSB) – to create the Study Group on Deposit Insurance. The Study Group was asked, among other things, to assess the desirability and feasibility of setting out international guidance on deposit insurance arrangements.
The Study Group’s report was tabled at a meeting of the FSF in March 2000. Based on the conclusions of the report, the FSF established the Working Group on Deposit Insurance to develop guidance on deposit insurance arrangements. The Final Report of the Working Group on Deposit Insurance, Basel, 2001 is built on three general findings. First, explicit and limited deposit insurance is preferable to implicit coverage if it clarifies obligations to depositors and creditors and limits the scope for discretionary decisions that may result in arbitrary actions. Second, deposit insurance systems must be properly designed, well implemented and understood by the public to be credible and avoid moral hazard. Third, to be effective, the deposit insurance function needs to be part of a well-designed financial safety net, supported by strong prudential regulation and supervision, effective laws that are enforced, and sound accounting and disclosure regimes
The efforts of this working group laid the foundation for the creation of the International Association of Deposit Insurers (IADI). In May 2002, the IADI was officially launched as an independent international organization to enhance the stability of financial systems by promoting the establishment of effective deposit insurance systems.
From 25 founding members, IADI has grown to become a global organisation with close one hundred members.