How does deposit insurance work?

#Why does deposit insurance exist?

Banks lend out or invest most of the money people deposit and keep only a small part in cash. That works fine day to day, but if many depositors try to withdraw at once, even a healthy bank can run out of ready cash. This is called a bank run. The IMF explains that depositors may withdraw their funds so fast that the small portion of liquid assets a bank holds is quickly exhausted, and that many countries insure deposits for this reason⁠^[1].

The International Association of Deposit Insurers (IADI), the global standard-setter for these schemes, puts it simply: the main public policy objectives are "to protect depositors and to contribute to financial stability"⁠^[2]. If ordinary savers know their money is safe up to a limit, they have less reason to panic, which makes runs less likely in the first place. To see how banks use deposits, read how banks make money.

Deposit insurance is one line of defence. Another sits on the bank's side: a sound bank that is short of cash can borrow from the central bank against collateral, which in the US means the Federal Reserve's discount window⁠^[3] — see how the Fed's discount window works.

#How much is protected in the US, UK and EU?

The UK limit rose from £85,000 to £120,000 on 1 December 2025 after a decision by the Prudential Regulation Authority⁠^[5]. The UK also protects temporary high balances, such as money from a house sale, up to £1.4 million for up to six months⁠^[5]. In the EU, the European Commission explains that deposit guarantee schemes are funded by banks themselves, not by taxpayers⁠^[6].

#What happens step by step when a bank fails?

You do not need to apply for insurance: the FDIC says that if you open a deposit account in an FDIC-insured bank, you are automatically covered⁠^[8]. The FDIC states that since it was founded in 1933, no depositor has lost a penny of FDIC-insured funds⁠^[4]. Note the word insured: money above the limit is a different story.

#What counts as one 'ownership category' in the US?

The US system is more generous than a single per-person number suggests, because the $250,000 limit applies to each ownership category separately: single accounts, joint accounts, certain retirement accounts, trust accounts and others⁠^[4]. For joint accounts, each co-owner's share of all joint accounts at the same bank is added together and insured up to the limit, separately from that person's single accounts, and shares are treated as equal unless the bank's records say otherwise⁠^[9].

The same logic in the UK works per person, per authorised firm. Someone with £150,000 in one UK bank would have £120,000 protected and £30,000 unprotected. Spreading the money across two separately authorised banks, £75,000 in each, would bring the protected total to £150,000. Be careful: some banking brands share one licence, so two app names can count as one firm.

#What does deposit insurance not cover?

Deposit insurance covers deposits: checking and savings accounts, money market deposit accounts, certificates of deposit and similar products. The FDIC lists what it does not cover, even when bought at an insured bank: stocks, bonds, mutual funds, annuities, life insurance policies and crypto assets⁠^[4]. Investor protection is a separate system, explained in how investor protection works.

It also does not cover the failure of a non-bank company. In the UK, the FCA warns that money held with a non-bank payment or e-money provider is not protected by the FSCS if that provider goes out of business⁠^[10]. In the US, regulators note that deposit insurance does not protect against losses from the failure of a third party such as a fintech app that sits between you and the bank⁠^[11]. See e-money and banking as a service.