What is a Deposit Guarantee Scheme?

Bank deposits are important for their owners to pay expenses and save for the future. The trust-based foundation of the financial system allows regular bank customers to retain higher deposits then necessary for their short term financial needs. Disruption of the financial supply chain may have spill-over effects to other sectors and must therefore be protected from different types of risk. Deposit taking and credit institutions active as retail banks must therewith implement several safeguards to resolve financial challenges when they appear. An interplay with the financial regulator allows for a resolution framework that includes resolution planning, statutory administration, deposit insurance via a local Deposit Guarantee Scheme, and bank liquidation.

Insolvency and the closure of a bank or credit institution is often similar to the dissolution of a company. Assets are realized and liabilities are paid from the proceeds. Capital shortages come at the expense of unsecured creditors, such as bank account holders. A deposit guarantee scheme upgrades the position of regular, yet eligible creditors by the provision of a deposit guarantee scheme. Deposit Guarantee Schemes are independent programs, paid by its members whose participation is mandatory for the maintenance of their license to conduct the business of banking.

Participants in a Deposit Guarantee Scheme form a homogeneous group of deposit taking credit institutions. To ensure public confidence in the financial system, the position of these financial institutions in society must be maintained. In contrast to traditional insurance, a Deposit Guarantee Scheme exclusively protects the account holders of the participants in the scheme. Contributions and premiums are paid by the participants in the scheme. Bank account holders and other creditors of the participants in the scheme make no financial contributions. Their claims to the scheme are eligible when the criteria to initiate a payout event are met, when national regulation foresees in coverage, and when the credit institution has honored its financial obligations towards the scheme.

Claim eligibility is a critical part of deposit insurance. Schemes seek to protect the public interest while avoiding unnecessary protection and unfair competition. Organizations with statutory priority in a creditor hierarchy, professional corporations such as financial institutions, pension funds and investment firms that are able to hedge their financial holdings, public authorities, and account holders that cannot be identified are excluded from deposit insurance by most schemes. Local DGS frameworks define the terms, conditions and applicability of the scheme. Creditors should therefore examine the terms of the scheme to prepare for appropriate DGS claim filing.

DGS claim filing requirements depend on the jurisdiction and applicability of the scheme. Some schemes have automatic control functions that instantly repay eligible account holders after little checks while others require claims to be submitted by the account holders in person at the premises of the DGS administration. Claim eligibility and verification is an important part of the procedure where schemes must avoid repayment to unqualified parties. This, once again, amplifies the importance of the understanding of the procedures and claim eligibility.

As a final note on Deposit Guarantee Schemes it must be clear that the scheme and the creditor have separated responsibilities. The scheme must ensure repayment to eligible creditors while the creditor must be ready and able to receive this compensation. Misconceptions arise where creditors do not or cannot comply with the repayment regulations. This is where DGS repayment planning becomes critical.