Unsung Saviours: Deposit Insurance amid Climate Change

DEPOSIT INSURANCE, a key component often managed by central bankers, is essential for maintaining financial stability.

- Srinath Sridharan

By protecting depositors and bolstering confidence in the banking system, central bankers act as unsung heroes, intervening decisively during banking crises to uphold the financial system’s integrity. As climate change introduces new and unpredictable risks, their role becomes increasingly pivotal.

India’s target of achieving net-zero emissions by 2070 will scale the importance of deposit insurance in ensuring financial resilience. The intersection of climate change and financial stability presents novel challenges that necessitate a robust framework to protect depositors and sustain confidence in the banking system. In India, deposit insurance is managed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India (RBI). Established under the Deposit Insurance and Credit Guarantee Corporation Act of 1961, the DICGC provides insurance coverage for depositors of up to Rs 5 lakh in the event of a bank failure. It also offers credit guarantees to banks, reinforcing the stability and trustworthiness of the Indian banking system.

Climate change introduces both physical and transition risks that can significantly impact banks and financial institutions. Extreme weather events may lead to asset damage and operational disruptions, while the shift towards a low-carbon economy can affect the value of assets in carbon-intensive sectors. These risks elevate the likelihood of bank failures, putting additional pressure on deposit insurance schemes. As such, deposit insurers must adapt their strategies to address these emerging threats, ensuring they maintain sufficient reserves and capital buffers to manage potential climate-induced claims.