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Who pays the premiums that fund a deposit insurance scheme?
AThe depositors, through a charge on each account
BThe central bank, out of the interest it earns
CThe insured banks, at a percentage of their deposits
DThe government, out of the taxes it has collected
Answer & Solution
Correct answer: C. The insured banks, at a percentage of their deposits
1. Deposit insurance is funded by premiums like any other insurance.
2. Each insured bank pays those premiums itself.
3. The premium is set as a fixed percentage of the domestic deposits of that bank.
4. So a bank holding more deposits pays more into the fund.
5. Depositors are the beneficiaries rather than the payers, which is the point most often mistaken.
6. Government backing stands behind the scheme, but the running cost is met by the insured institutions.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 15 "Understanding Money and Financial Institutions", section 15.4 Insuring Bank Deposits_
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