Financial stability is interconnected with public confidence. Public confidence is among other things enforced by deposit insurance in the banking sector. Deposit insurance helps ensure confidence of bank account holders in the financial system and prevents contagious bank runs. It also comes with an unintended consequence of encouraging banks to take on excessive risk and indifference on the part of creditors. Resolution authorities act early and aggressively to limit damages to the financial system and its stakeholders. This is when deposit insurance provides bank account holders with much needed liquidity to go on with their lives while the resolution authority finds the best solution for the troubled financial institution.
In general, Austrian banks are well regulated and safe. However, with 543 licensed and supervised credit institutions, the Austrian financial sector requires an efficient and effective regime to control the dealings of each and every one of them. The hierarchy of supervision requires financial institutions to appoint internal audit divisions to monitor and control their (financial) operations. Supervisory boards and external auditors are the second level of defense while the supervisory authority has the final oversight of the financial sector and its individual market participants.
Economic and financial crises happen. They come unpredictable and often have adverse effects. For retail depositors and small business owners the failure of their bank restricts their access to often hard needed liquidity. There are two main reasons they need a swift solution. The first reason is rational, they just need the money to finance their short term affairs. Their second driver is more emotional. Public confidence is often diminished during economic crises. This decline is furthered when banks fail and bank account holders lose access to their income payments, and savings. Deposit protection in Austria is arranged by the banks on behalf of eligible account holders so that in times of crisis, account holders regain swift access to their insured account balance.
The Objectives of Deposit Insurance
Deposit insurance has two important incentives. These are considered from the point of the account holder and the supervisor. Bank deposit protection and deposit guarantee schemes provide repayment of secured balances to eligible account holders. The perspective of the bank supervisor is that confidence in the financial system is maintained when public trust in the banking sector remains high even when banks fail and account access is restricted. As a result a contagious run on the liquidity of the bank can be avoided. It is therefore mandatory for licensed financial institutions to participate in a domestic deposit guarantee scheme.
The objective of bank deposit insurance can be seen as an integral, yet short term financial safety net to the banking system. Comprehension of the underlying foundation helps to avoid a false sense of security for creditors who assume they are insured but in reality are not covered by the applicable scheme.
Legal Foundations and Claim Eligibility
Resolution of banks or credit institutions that fail or are likely to fail is subject to distinct rules. At a local level the Bankwesengezetz (BWG – Austrian Banking Act), Bankensanierungsplanverordnung (BaSaPV – Bank Recovery Plan Regulation), and the Einlagensicherungs- und Anlegerentschadigungsgesetz (ESAEG – Deposit Guarantee Schemes and Investor Compensation Act) regulate and de-escalate challenges in the financial system. To promote sector wide stability and provide a uniform level of protection throughout the European single market, EU Directive 2014/49/EU defines the EU wide framework on deposit guarantee schemes.
Reimbursement of account balances to its owners is referred to as a pay-out event. A pay-out event is determined by the Financial Market Authority (FMA) and occurs when a member institution is unable to pay out deposits due to its financial situation whilst there are no prospects of it being able to do so in the future. The FMA may also trigger a pay-out event when a government decree results in the shutdown of payment facilities and restrictions on payments, or when bankruptcy and resolution procedures are initiated against the financial institution.
Following the harmonized approach throughout the European single market, eligible deposit for deposit insurance are clarified in the EU recast directive 2014/49/EU and at a local level the ESEAG. In Austria, bank account deposits are covered for an amount of 100.000 Euro, and in exceptional cases up to 500.000 Euro, unless one of the following exceptions applies. Eligibility of a deposits is communicated in the account statement or online banking environment of the client. Not eligible for repayment are accounts held by other credit institutions, own funds, deposits for which criminal convictions of money laundering in Austria are confirmed, deposits by financial institutions, investment firms and pension funds, as well as accounts for which the beneficiary cannot be identified. Misunderstandings apply to terminology mostly where it refers to financial institutions. These are legal entities able to protect themselves against financial losses by their status or activities.
Deposit Protection in Austria
Austria knows three different deposit guarantee facilities. These are the Einlagensicherung, Österreichische Raiffeisen-Sicherungseinrichtung, and the Sparkassen-Haftungs. The independent funds protect bank account balances and their owners against losses in the event of failure and involuntary closure of their bank. The fund limits protection to 100.000 Euro from a common fund of which funding is based on deposit-based and risk-based premia paid by participating banks. This structure allow the funds to repay eligible account holders within 7 and 10 working days.
Claim Filing Procedures and Pitfalls
Bank account balances, regardless of their currency, held by natural persons and legal persons may qualify for deposit protection in Austria. Authorization for repayment is exclusive to the account holder. Verification may apply to unclear requests. Local account holders must inform the deposit guarantee facility about the existence of their account. For international creditors, and those with balances that temporarily exceed the initially insured 100.000 Euro, different claim filing procedures may apply. Applications shall be made by the creditors within 12 months of the occurrence of the pay-out event. Distinct from other international schemes, the Austrian deposit guarantee schemes may not deny repayment of an insured account balance to an eligible creditor on the grounds of expiration of this period. However, exclusion, deferment and suspension of repayment remains possible.
Recovery of Large, Unsecured and Subordinated Deposits
The fundamental pillars of bank resolution in Austria are special administration, deposit insurance and resolution itself. To promote confidence in the financial system, the first two phases provide small businesses and retail depositors with liquidity to continue their daily operations. Bank resolution aims to find the appropriate solution for a financial institution in distress. This may involve reorganization or restructuring of activities, recapitalization of the bank, or the winding up of the financial institution via receivership, liquidation or bankruptcy procedures.
Article 12 of the ESAEG may raise the limit of deposit insurance for eligible account holders from 100.000 Euro to 500.000 Euro. Creditors with account balance that exceed both the standard limit and the temporarily high balance, or whose account balance is not eligible at all for DGS coverage should focus on a diversified recovery strategy.
Remedies may result in loss absorption by account holders, creditors and shareholders. It is therefore critical that creditors participate in repayment procedures during statutory administration, deposit insurance and bank liquidation, while they investigate their options for (collective) civil action. For more information and to discuss your case, follow the steps below.
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This website is an initiative of Legal Floris LLC. Since more than a decade, we have helped international creditors recover money when their bank fails or their investments disappear. Due to our vast experience in dozens of bank failures in different countries, we are able to maximize repayments and minimize risks for our clients. Contact us right now to find out how we can help you too to reclaim your account balance:
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