How Inflation Impacts Deposit Insurance: Real Coverage and Coverage Ratio

The recent emergence of inflationary pressures across the globe has presented an additional consideration for deposit insurers. This Policy Brief considers how inflation may impact on two key concepts of deposit insurance: coverage levels and coverage ratios. We introduce the concept of 'real coverage' and using IADI data, we illustrate that the cumulative impact of inflation over the years on coverage levels may be significant as increases in general price levels erode coverage and lead to a decrease in the real terms of unchanged nominal coverage levels. Using this metric in reviewing historic increases in nominal coverage levels by a limited number of deposit insurers only, we find some indications for consideration of real coverage levels in setting policy. Inflation affects coverage ratios, which are a prominent element of deposit insurers' policy. The impact of inflation is highly complex and may depend on a number of variables, including the duration and sudden nature of inflation and its distributional impact on wealth and savings. Using IADI Annual Survey data from the past seven years, we investigate the correlation between inflation and both eligible and covered deposits in nominal terms. We find evidence for both nominal covered and eligible deposits to grow at rates below inflation rates. Ignoring distributive effects of inflation on saving rates across income groups, this implies that all else equal, to hold an existing coverage ratio, deposit insurers can increase coverage levels at a ratio below inflation. An upcoming policy brief will cover the inflation considerations in international deposit insurance standards and governance arrangements.