Legal Definitions - guaranty fund

A guaranty fund is a type of fund that is primarily raised by assessments on banks and used to pay the depositors of an insolvent bank. It is a private deposit-insurance fund that acts as a safety net for depositors in case a bank fails. Guaranty funds were established before the federal-deposit insurance, which began in 1933, and many funds continued until the savings-and-loan crisis in the 1980s.

For example, Massachusetts has a guaranty fund for uninsured deposits (deposits above $100,000) that are not covered by federal-deposit insurance. This fund is used to compensate depositors for their losses in case of a bank failure.

Another example is the client-security fund, which is established by a state or a state bar association to compensate persons for losses that they suffered because of their attorneys' misappropriation of funds or other misconduct.

These examples illustrate how guaranty funds are established to protect depositors and clients from financial losses due to the failure or misconduct of banks or attorneys.