Is Deposit Compensation for Bank Creditors Guaranteed?

Bank deposit protection is managed by local deposit guarantee schemes. Following the objective of such deposit insurance programs, domestic objectives determine the scope and applicability of the scheme. Therefore, deposit compensation is only guaranteed for eligible bank creditors. Eligibility is laid down in local regulation and may differ from country to country. There are however several commonalities of these schemes. These are outlined in this article.

The term bank deposit guarantee scheme alleges that every bank account is covered by this type of insurance. In reality, deposit protection has similarities to any other type of insurance. It only covers the insured event for eligible parties. Traditional insurance awards compensation to the policy holder in return of a premium being paid to cover the insured event. Bank deposit compensation however covers bank account holders while periodic premiums are paid by the bank to an external insurance fund. Similar to the policy language in traditional insurance contracts, the policy language and agreement in place decides on the coverage of the insurance. As a result, deposit compensation for bank creditors is only guaranteed when the insured event and the creditor are part of the terms of the policy or agreement.

Creditors often question whether their bank deposit compensation is guaranteed after a financial institution fails and a moratorium on payments is announced. Most retail depositors and small business owners are caught by surprise by the event. A period of uncertainty is forthcoming. Deposit insurance provides eligible creditors with repayment of their insured deposits. The scheme must first be activated to cover a maximized amount. Activation is announcement by the DGS administration via several outlets. These outlets include the failed bank, the regulator or administrator and often picked up by regular main stream media.

Eligibility determines whether a bank deposit is guaranteed, or not. Such eligibility is announced in the terms of the local deposit protection scheme. Financial institutions must also inform their clients about the terms of the scheme. Eligibility is verified by the DGS administration. Claimants must present verifiable evidence of their claim to the DGS administration. The administration then matches this information with the available data in the records of the bank. Eligible creditors receive compensation while rejected claims can be appealed or resubmitted for a second opinion. To make a long answer short, deposit compensation is only guaranteed for eligible creditors who file their claim according to the parameters set out by the DGS scheme, within the applicable time frame.