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Why does SDIC only guarantee $50,000 of your deposits?

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I frequent the BIGS World – Build Wealth, Live a Good Life Facebook group and came across a really great question.

Namely – Why is SDIC protection so low ($50,000 SGD) in Singapore? Especially compared to US banks which protects deposit up to $250,000 USD.

Singapore Deposit Insurance Corporation or SDIC is the government-chartered organization which oversees Singapore banks’ Deposit insurance program which protects bank deposits up to $50,000.

The US equivalent is the FDIC, which protects bank deposits up to $250,000 USD.

John Lam who used to work in the Balance Sheet and Liquidity Management team of an American Bank gave this great answer which I had to share:

Good question. But it is also important to note that there is a cost to this insurance.

Currently the premiums are paid by the member banks and it doesn’t impact depositors directly. But this is still a part of the banks’ operating expense and will have impact on the banks profitability and ability to invest into services and platforms to service clients.

Increasing the SDIC to USD 250k equivalent will mean an increase in SDIC cost for banks by approximately 6.75 times (after factoring for exchange rate differences).

Generally this premium will decrease over time as the deposit insurance institution builds up a “war chest” from the contributions of member banks.

The FDIC was set up in 1933. So they have an 85 year time period to collect premiums to insure deposits.

The SDIC was only setup in 2006. So it has a 73 year time gap to catch up on collecting premiums.

An alternative way to finance increased coverage would be to charge the premium directly to depositors. However, as interest rates in Singapore are already very low, this would not be feasible. In places like Indonesia and Thailand, there is a deduction of 20bp and 47bp respectively for deposit insurance purposes.

The good news is that from April 2019 next year, this amount will increase from 50k to 75k.


No explicit guarantee, but is there an implicit one?

Just to add on to his answer, even though our bank deposits are only guaranteed up to $50,000 as of now, the government has acted before in times of financial stress.

Taken from the MAS website:

In October 2008, President S R Nathan gave his approval for a S$150 billion guarantee on all bank deposits in Singapore to be backed by Past Reserves.

This was against the backdrop of the Global Financial Crisis where other jurisdictions were guaranteeing bank deposits as well.

If Singapore had not provided a guarantee, we would have run the risk of funds flowing out of Singapore to other jurisdictions that had guarantees, even though our financial system was sound.

The guarantee lapsed on 31 December 2010, without being triggered. In this case, Past Reserves were not drawn on, although it could potentially have been.

Just food for thought!

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