An insurance scheme to protect individuals, charities and small businesses in the event that a bank fails has been approved by the House of Assembly.Introducing the Deposit Insurance Act, Premier and Finance Minister Paula Cox said the Island’s banking system is strong, but recent global financial turmoil has led to a re-evaluation of the “safety net”.The Act will bolster public confidence in the banking system, she said, by providing insurance coverage to depositors in banks and credit unions that are members of the scheme.“Membership of the Deposit Insurance Scheme [DIS] will be mandatory for all four commercial banks, the one deposit company licensed under the Banks and Deposit Companies Act 1999 and the sole credit union,” she explained.The maximum threshold for compensation will be $25,000, although that amount “could grow over time”.The legislation will put a Bermuda Deposit Insurance Corporation [BDIC] in place to administer the scheme, which will be funded by its members in advance of any claims, to bring greater stability and confidence to the Island’s financial system.Ms Cox told the House of Assembly: “The financial safety net typically consists of three elements: prudential regulation and supervision, a lender of last resort, and deposit insurance.“In Bermuda, which has no lender of the last resort and currently no deposit insurance, the safety net relies heavily on prudential regulation and supervision by the Bermuda Monetary Authority [BMA].”She said while this approach has served Bermuda well in the past: “The unprecedented developments affecting banks in the major developed economies over the past three years suggest that we should now consider the establishment of a deposit insurance scheme in Bermuda to complement the role of the BMA and provide a further layer of protection to depositors.”She explained: “Deposit insurance is a guarantee to depositors in a bank that they will be compensated up to a maximum specified amount of their deposits upon failure of that institution. The primary function of a DIS is to provide enhanced protection for depositors in the event that an individual banking entity has solvency or other problems that threaten its survival. A well structured DIS can also help to bolster public confidence and thereby help to reduce the risk of problems in one bank escalating into a crisis or spreading to other banks.”The Opposition tried and failed to push through an amendment to the act.Shadow Finance Minister Bob Richards began by saying: “We have a very unusual banking system in Bermuda. We have 65,000 people but total deposits of $20 billion, and only $4 billion of that is in Bermuda dollars. So even if this insurance scheme covered all the Bermuda dollar deposits, it would still be only 20 percent of the deposits in our banks. The other 80 percent is with international clients, trusts and so on.”A large country such as the US has a three-layer safety net, he said, of currency control, the Federal Reserve or central bank, and the Federal Deposit Insurance Corporation.“We have seen bank failures in their multitudes in the US, in spite of those three layers,” he said.Bermuda, on the other hand, has no central bank.The Deposit Insurance Act would “in no way protect us from bank failures”, Mr Richards charged.“We had a mini ‘run’ on a bank here three years ago, and I think we got lucky. We don’t have an early warning system that’s good enough.” Mr Richards added that “if we had gone another week, there would not be a Butterfield Bank”.He continued: “We are not talking about saving the banking system. It’s for people to have something if the system falls down and the prospect of that in Bermuda is very frightening.”Mr Richards also said the Act would affect some banks more than others, since “smaller banks have a higher proportion of Bermuda dollars than others” and would therefore have to pay proportionally more.He asked Ms Cox: “Why don’t we just reinsure?”Mr Richards said bankers had told him that no such product existed. “But we are Bermuda. We should be able to come up with something.”Youth Minister Glenn Blakeney then rose, calling the Act “a fantastic beginning”.Mr Blakeney questioned why, if reinsurance experts had told Mr Richards that the reinsurance product in question did not exist, “did he ask the experts how it could be done?”In the matter of the Butterfield Bank crisis, Mr Blakeney said: “There was no hesitation, because the country came first. It was not a matter of luck. It was tough decision-making.”Mr Richards also cited concern over an aspect that allows the BDIC to invest in the fund through various securities guaranteed in specified ways. He expressed concern that this includes securities denominated “in a freely convertible currency”; yet there are no restrictions specified on the type of currency.Mr Richards said it is important to make sure such investments are made “wisely” and as such, he wished for a restriction on the term “freely convertible currency” so that it only refers to US dollars, which are linked to the Bermuda dollar.He later told The Royal Gazette: “The issue here is to have the assets of the BDIC be in the same currency as the liabilities.“If they are not, then currency movements can result in a loss in the relative value of assets to liabilities. My amendment (related to) forcing the assets to be in US dollars which are locked to Bermuda dollars.”Ms Cox noted that “the issue here is to make sure that it’s risk-averse” and said she agreed with Mr Richards’ sentiment.However, she said, his suggested amendment was “limiting it too much”. She said that notwithstanding Bermuda’s faith in the US dollar, it would not be right to limit investment purely to the US dollar.“We are not going to invest in African whatever. We are going to have prudence,” she assured the House.The Government MPs blocked the suggested amendment when a vote was taken, and the bill passed as originally drafted.