Bank depositor protection is an additional safeguard for customers of credit institutions to provide them with liquidity to mitigate financial risk for imminent difficulties and lengthy resolution procedures. Deposit Guarantee Schemes (DGS) are a mandatory pillar of risk management for licensed credit institutions. Voluntary withdrawal from the fund, or removal by the administrative board of the applicable DGS has repercussions for the credit institution. This may involve the withdrawal of the license to operate in the financial market.
Resolution authorities protect the financial system from disruption. Early intervention helps to mitigate the risk of failure by isolating the challenges within the bank to define appropriate solutions to safeguard the financial system. Bank recovery and resolution is a complicated matter. It often involves multiple jurisdictions and different legal systems while account holders, creditors and other stakeholders must be satisfied as well. Stakeholder satisfaction is part of the public interest doctrine and therefore urges financial institutions to participate in and implement depositor protection frameworks.
Bank failure is hard to fathom by unaware stakeholders. Account holders and other creditors rely on their bank to execute daily transactions and even save for a rainy day. The closure of the bank, whether temporary or permanent, has a severe impact on their confidence in the system. Public confidence in the financial system is needed to maintain the current framework that relies on liquidity to support economic growth. Bank depositor protection aims to manage the emotionally loaded response of creditors and avoid situations where creditors lose access to their earnings.
Depositor protection is managed at a local level. Members of a DGS fund are supervised credit institutions that take deposits and make loans to their customers. These members pay standard contributions and annual quantity and risk-based premiums to the scheme to create a general fund that can be called upon when one of the members fails or is likely to fail. The advantage of the funding and remuneration of the scheme is that repayment to eligible creditors can take place fast. In most jurisdictions, claim verification and approval is followed by payment within seven working days.
Claims to the Deposit Guarantee Scheme need documented evidence to verify and confirm their eligibility. Some schemes simply provide a restricted bank check to eligible creditors who need to ensure compliance with the terms of the collection of the bank check. Other schemes only pay out by bank transfer but require the creditor to provide verifiable bank account information of the account holder. For unaware and international creditors these rules are not always easy to conform to. Therefore, our free case evaluation may help them to avoid struggles with the approval of a DGS claim and the repayment of the insured account balance.