Salaries, pensions, annuities or stipends usually flow into our accounts at banks, where we also keep savings in deposits or accounts. If a bank goes bankrupt, is the money irretrievably lost? Fortunately not. This is because the Deposit Guarantee Schemes watches over the injured.
However, the Fund's activities do not mean that every bank customer, regardless of the amount, currency and type of their deposits, can rest easy. It is worth reading the information below to find out the conditions, amounts and timing of any withdrawals from the DGS.
Is this the end of the turmoil around the banks?
The reliability of the saying "safe as in the bank" has recently been eroded by serious problems for institutions on both sides of the Ocean. Nervous moments were experienced by, among others, clients of Silicon Valley Bank and First Republic Bank in the USA, but also Credit Suisse in Switzerland and Deutsche Bank in Germany. This raised fears for the health of the entire industry.
Although the situation seems to have been brought under control in the past weeks, these events cannot be taken singularly. Further upheavals in the financial sector are likely to take place as long as the restrictive monetary policies of the major economies continue. Meanwhile, none of the major central banks has yet officially completed the cycle of interest rate rises, let alone inaugurated a series of reductions towards pre-pandemic levels.
In the Eurozone, security is up to €100,000, in the US $250,000.
Since concerns about the health of banks may remain valid in the coming months, the fear-laden questions seem legitimate:
- Is our money safe in banks?
- What might happen if the bank in which we have an account, a deposit or a foreign currency account crashes?
- Are the funds irretrievably lost with the collapse of such an institution?
- And if not, what should be done to get it back?
The good news: in the event of a bank failure, the customer will get his money back, and with the interest accrued up to the date of the announcement of the closure of the institution, thanks to the activities of the Bank Guarantee Fund. The bad news: the DGS only protects customer funds up to a certain ceiling. In all EU countries, this is €100,000. Higher guarantees are in force in the USA, where in the event of a bank failure the Federal Deposit Insurance Corporation pays out funds to customers up to USD 250 000, or at Cinkciarz.pl's rates just over EUR 232 000, and in the UK the guarantee covers funds up to £85 000, or around EUR 97 000.
The banks themselves contribute to the DGS
Where does the money for possible payouts to customers in the Bank Guarantee Fund come from? It is made up, in the form of deposits, by all banks domiciled in the Eurozone. Irrespective of their form of activity, with the exception of the European Central Bank and mortgage banks, which do not, as a rule, carry out deposit activities. Funding for the Fund also comes from sovereign grants and borrowing from the ECB.
If a bank in a member state were to fail, a customer holding an amount significantly higher than €100,000 in the bank does not have to accept the loss of that which goes beyond the framework set by the DGS. Indeed, the aggrieved party can recover the rest of his or her funds through insolvency proceedings, as long as he or she submits his or her claim within the time limit indicated in the court's bankruptcy order.
How long does it take to receive a payment from the Fund?
Someone who entrusts more than €100,000 to banks, assuming there is a margin for the institution to fail, can avoid waiting for insolvency proceedings to conclude. All they need to do is divide their funds so that they do not hold more than €100k in one bank.
When declaring bankruptcy, it is about the moment when the European Commission announces the suspension of the bank's activities and the appointment of a receiver and applies to the court for a declaration of bankruptcy.
What appears to be a rather favourable solution for a potential client of a failed bank, the DGS undertakes to pay out the funds (within the guaranteed limit, of course) within seven working days of the fulfilment of the guarantee conditions, and the right to claim payment is time-barred after five years.
Banks aren't everything
However, it is worth being aware that, in the event of serious trouble for a bank, a decision to declare it insolvent will not be made "out of the blue". In view of such risks, in uncertain times for banks, part of the savings can be diversified by investing, for example, in shares, bonds or ETFs or precious metals. Cryptocurrencies could be an alternative, albeit with a high risk of volatility.
Those who do not want to rely on financial instruments and prefer to hedge in dollars, francs or euros can also consider the offer of fintechs, which, although they do not generally provide term deposits or interest-bearing accounts, funds can be accumulated here in a virtual currency wallet.
Good to know
- If a customer of a bank operating in the Eurozone that has declared bankruptcy deposited funds with the bank only in a foreign currency account, e.g. in dollars, the Fund will reimburse the equivalent, but only in euros.
- Depositing funds in different accounts or deposits in the same bank will not result in the customer being able to count on a payout greater than the equivalent of EUR 100,000 from the DGS in the event of the bankruptcy of that institution.
- The method and date of disbursement of the guaranteed funds shall be made public on, among others, the Fund's website. Insolvent banks are also to inform about it.
- The DGS funds can be collected in cash or in the form of a transfer to an account indicated by the customer of the insolvent bank.
Grzegorz Dróżdż, CAI, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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