When is a Deposit Guarantee Scheme Activated For Retail Customers?

The payment system is the core foundation of society. Income and expenses are these days mostly paid via electronic channels. Disruption of these channels results in challenges for the real economy. Different measures are therefore implemented to ensure that safety-nets and other protection provides for the cushion when and where required. Bank deposit protection is one of these measures that applies to retail depositors and aims to ensure that the payment system continues by providing liquidity in the form of a prepayment of the insured account balance when a bank fails or is likely to fail.

Bank deposit protection is mainly focussed towards payment systems. These are used to keep a local economy going. To avoid disruption of financial value chains, liquidity provision supports micro economic challenges while it maintains confidence in the financial system. Deposit guarantee schemes thus play an important role in the protection of a local economy and the current financial structures.

Depending on the jurisdiction, deposit guarantee schemes are triggered when a bank is failing or likely to fail, when the financial institution is unable to repay its creditors on demand and when there are no short-term prospects that this situation will change. The determination of such a status is exclusively made by the regulator, supervisor or the responsible court. Announcements of statutory administration and early intervention are made in the state journal and the other official communication channels of the regulator.

Upon announcement of the activation of a deposit guarantee scheme, creditors are informed on the procedures of claim filing. These procedures are dependent on several factors which include among other things the risk profile of the bank, type of customers, size of deposits and the activities of the account holders. Distinctions exist on different levels and range between issuing a bank check to be deposited by the eligible creditor elsewhere to the invitation to submit a claim in person at the premises of the DGS administration.

DGS claim filing procedures include the verification of claim eligibility. Some schemes allow for deviation of the standard insured deposit and raise limits for temporarily high account balances. Creditors must then substantiate their position and claim eligibility. This burden of proof is often lower for the standard DGS claim, which includes the presentation of a claim form supported by identification of the account holders and verification of the account balance and its claim eligibility.

Submission of a DGS claim must happen within a predefined timeframe, often between one and five years from the activation of the scheme. The DGS administration then verifies whether the information available in the records of the bank match with the information presented on the claim form. Payment is made to the creditor when the claim is eligible. Restrictions may apply to the receiving institution of the approved payment. Compliance with DGS frameworks and anti-money laundering regulation restricts repayment to the account of an account holder at a supervised and licensed credit institutions. It is the responsibility of the account holder to comply with these rules and satisfy these repayment conditions.