Understanding Deposit Insurance: What Is It and How Does It Work?

Bogotá — With the uncertainty generated by the collapse of several banks in the US, including Silicon Valley, many distrusted the banking system despite the actions of the authorities in that country. This type of situation puts on the table the importance of deposit insurance, what are they and how do they work?

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Deposit Insurance: What is it and why should I know about it?

In Colombia, there is the Guarantee Fund for Financial Institutions (Fogafín). Faced with a possible crisis and bankruptcy of an entity attached to this entity, there is insurance that protects Colombian savers and guarantees depositors the recovery of their savings of up to $50 million.

According to Germán Machado, professor of economics at the Universidad de los Andes and CESA, “this insurance is very important because it helps savers protect their money, but also gives greater confidence in the financial sector and helps to avoid (or mitigate) financial crises”.

“This insurance is precisely one of the first things that must be taken into account when making some investments. It is advisable to look for financial institutions that are insured and recognized and registered with Fogafín to guarantee the safety of savings and not fall for scams”, added the teacher.

What are the entities registered in Fogafin?

Currently, in the deposit insurance system managed by Fogafín A total of 56 financial entities are registeredof which 29 are banks, 5 financial corporations, 15 financing companies and 7 companies specialized in electronic deposits and payments (SEDPES).

Here you can find the complete list of entities attached to deposit insurance in Colombia.

How much does it cost?

It costs the saver nothing. The resources that constitute the reserve that Fogafin manages come from the payment of a premium that the registered entities must assumecorresponding to 0.3% of total insured deposits.

How is the Deposit Insurance acquired?

It is acquired automatically when a protected product is contracted. In other words, depositors, whether natural or legal persons, are beneficiaries of the insurance for the simple fact of carrying out the process of opening or renewing it.

What products are protected by Fogafin insurance?

• Current account deposits
• simple deposits
• Certificates of Term Deposits (CDT)
• savings deposits
• special savings accounts
• Mortgage bonds
• special deposits
• collection banking services
• Low amount deposits and ordinary deposits

Which are not protected by deposit insurance?

• trust products
• Insurance
• ordinary bonds
• Bonds mandatorily convertible into shares (BOCEAS)
• Bonds optionally convertible into shares (BOCAS)
• Products offered by entities not registered in Fogafín

Some recommendations

According to Machado, Since deposit insurance does not cover all possible investment instruments, it is important:

• Investigate well the investment alternatives, their history and their past performance. It is a good idea to understand the risks and rewards associated with the investment before making it. A general rule is not to invest in what is not understood.
• You have to diversify. It is better not to invest the money in a single investment and to have assets with different levels of risk.
• It is necessary to understand well what are the objectives of the investment and what is the horizon to which you want to do.
• Regular monitoring of investments Allows you to make adjustments, if necessary.