Bermuda residents are a step closer to having insurance coverage for their cash in the bank.

Financial regulator the Bermuda Monetary Authority yesterday published a consultation paper on its plans for a deposit insurance scheme.

Aimed at protecting small depositors, it would cover up to $25,000 per depositor, per institution.

The insurance premiums would be paid by the Island's licensed financial institutions and the scheme would be managed by a newly created body, to be known as the Bermuda Deposit Insurance Corporation (BDIC).

According to the International Association of Deposit Insurers' website, deposit insurance schemes operate in 106 countries.

The financial crisis, which caused many banks to fail around the world, highlighted the issue of deposit insurance. The absence of such a scheme in Bermuda was discussed after Butterfield Bank ran into difficulties that required it to raise hundreds of millions of dollars of extra capital over the past year or so.

"As Bermuda's financial services regulator, one of our most important responsibilities is deposit-holder protection," said Jeremy Cox, CEO of the BMA.

"Traditionally, we have relied on prudent and effective supervision of the banking sector, ensuring that Bermuda banks operate within strict levels of solvency and liquidity.

"This approach has served Bermuda well, however the challenges presented by the global financial crisis highlighted the potential enhanced protection offered by a deposit insurance scheme (DIS), and the benefits of having such a facility in place. The addition of a DIS in Bermuda will further strengthen the financial safety net for retail depositors in our market."

The consultation paper sets out the objectives, rationale and proposed features of the DIS. The objectives of the DIS are to protect small depositors, to promote stability in Bermuda's financial system and economy, and to promote competition within the banking sector.

The Consultation Paper presents proposals for, among other matters, the structure and administration of the DIS, the scope and amount of its coverage and funding of the scheme.

The coverage proposed would mean that in the event of a local bank failure, individuals with bank accounts with that institution would be reimbursed for all their deposits combined up to a maximum of $25,000.

The BMA's director of banking, trust and investment, Graeme Dargie said: "In developing the maximum coverage amount, the Authority had to balance the issues of enhancing financial stability in the marketplace with the need to keep the funding costs of the scheme within reasonable levels.

"The cost of the scheme and how it will be funded remains a key discussion point within our consultation with the market. The formula proposed by the Authority to determine the coverage amount was based on a recommendation by the International Monetary Fund and is consistent with international best practice.

"In addition, it would meet one of the objectives of the DIS by covering the vast majority of small depositors on the island."

"It is important to note as well that the Authority's recommendation to set the maximum coverage amount at $25,000 is a starting point to establish the scheme. This amount can and should be reviewed periodically to ensure it remains appropriate."

The BDIC, as manager of the scheme, would collect premiums and assess claims and compensation payouts. The BDIC would also be responsible for reviewing the maximum coverage amount of the scheme in consultation with the market, if deemed necessary.

The Authority developed the DIS proposals after extensive consultation with representatives from the Ministry of Finance and local banks. In addition, the Authority received technical assistance from the International Monetary Fund (IMF).

A copy of the consultation paper is available on the BMA website at www.bma.bm. Interested parties are invited to send their comments via email to policy@bma.bm by October 31, 2010.