Deposit insurance or deposit protection is the foundation of a recovery process in bank failure. Such early intervention is mostly the first step after the resolution decree is issued to regain access to insured deposits. Deposit taking credit institutions are required to participate in the domestic deposit guarantee scheme. Local account deposits are forwarded to the central bank or public DGS administrator. The administrator determines the risk profile of the overall account portfolio and designates a risk based premium to be paid by the credit institution. Some account types, such as governments, municipalities, tax authorities and financial institutions are excluded from DGS coverage. The DGS committee can choose two ways to operate the scheme: either as a plain insurance policy where premiums, interest and actuarial calculation form the target level, or by giving the scheme the highest priority position in the future liquidation of the credit institution.
There are differences between the EU wide depositor protection guidelines and the US based FDIC program. The European directive on deposit guarantee schemes (2014/49/EU) has no direct effect in the legislation of the individual member states. Therefore, the member state is free to decide how the end goal of deposit protection is met, although the insured amount and the requirements under which a claim is honoured are binding. This leaves differences in the execution of the DGS scheme in various EU member states.
Important to realise is that a DGS covers legal entities. This means that an equal distribution of clients assets over different accounts limits the risk of a subordinated position in the liquidation or even bail-in of the bank. A bank under resolution is not able to make outgoing transactions, however, there is often still a possibility to make inter-bank transfers. Bank customers with several accounts are urged to balance out their accounts to mitigate their risk of deposit write down during the liquidation.
By filing a claim under a DGS, jurisdiction is decided by the creditor. This means that during a liquidation of the mother company or a subsidiary in a different country, the remaining claims in alternative jurisdictions are subordinated after secured deposits are paid. The advantage of filing the DGS claim alongside the payment of the insured deposit, is that the creditor and deposit are scrutinized by the credit institution and the administrator of the DGS, which ensures a swift approval during the liquidation of the credit institution.