Banker's Blanket Bond

What Is a Banker's Blanket Bond?

A banker's blanket bond (BBB) is a fidelity bond purchased from an insurance broker that protects a bank against losses from various criminal acts carried out by employees. A banker’s blanket bond is also known as a blanket fidelity bond. Some states require blanket bond coverage as a condition of operating a bank.

How a Banker's Blanket Bond Works

A fidelity bond is insurance coverage against losses that stem from the dishonest acts of employees. The banker’s blanket bond may be applied to individual employees or job positions in the company.

For example, a bank can insure a specific bank manager or choose to insure the position itself so that any employee who assumes those job responsibilities is automatically covered. Some of the types of losses that arise from employee criminal acts covered by a blanket bond include robbery carried out by an employee and forgery.

Losses from fraudulent activities carried out by non-employees are also covered under the bond policy.

A banker’s blanket bond is an insurance policy that provides coverage against the direct financial loss from forgery, cyber fraud, physical loss of or alteration to property, extortion, and employee dishonesty. The employee must have committed these fraudulent acts for personal gain for the company to make any claim against the bond.

This means the bond does not cover the activities of employees who commit unethical transactions for the purpose of making a financial institution appear healthier. For example, losses that result from an employee that cooks the book or engages in other creative techniques to put the company in a better light than it actually is will be exempt from coverage.

The blanket fidelity bond is classified as a first-party coverage since it covers the institution itself, not the account holders or shareholders. However, this bond is not to be taken as a form of credit insurance.

A banker’s blanket bond does not extend credit or assumes the credit risk of the borrowers. Credit risk management is a component of the bank's core operations and is the sole responsibility of the financial institution. The blanket bond deals only with extra-ordinary events related to employee criminal activities and is a regulatory requirement in some states requiring banks to obtain fidelity bonds to operate.

Special Considerations

Measuring the external level of risk and loss of money and securities due to fraud or cybercrime, such as ransomware, can be relatively easy to determine compared to financial loss that may internally arise due to employee shenanigans. Therefore, deciding the necessary amount of bond coverage that a financial institution requires can present a serious challenge.

Insurers typically analyze the number of employees and their responsibilities, the employee turnover rate, the average level of exposure from daily business operations, the types and average amount of transactions conducted daily, and the amount of cash held by the bank.