Frequently asked questions about NDIC

How does deposit insurance maintain financial system stability?
Financial institutions play an important role in regulating the supply and demand of capital and promoting economic development. They accept deposits, which are a highly liquid form of debt, yet most of their assets are tied up in long-term illiquid vehicles. Financial institutions therefore have a hard time realizing their assets for cash, when their business runs into problems, so depositors may lose confidence, triggering a bank run. The limited liquidity of financial institutions also encourages a perception among depositors that making an early withdrawal is the only way to get their money back. This sentiment can exacerbate a bank run and also have a chain reaction that leads to runs on other banks as well. Deposit insurance system is usually established to prevent this by providing assurance of deposit repayment to the great majority of depositors. In doing so, the system also prevents systemic risk and ensures the stability of the financial system.