The European Economic Area (EEA) stands for uniformity. This means that the European borderless single market should provide an equal level playing field in all the member states. Such equal treatment also applies to the financial markets. As a consequence, citizens of a member state should expect uniformity and where differences appear, may not be discriminated against. Credit institutions with a permanent establishment, subsidiary, branch or head office in the EEA are therefore subject to the Bank Recovery and Resolution Directive (BRRD) and a uniform deposit insurance framework. Before we can go into the question of repayment timeframes, it is important to understand the working of the bank liquidation and recovery procedures. This will be explained in this article.

Banks in the EEA hold a license as a credit institution. This license is granted by a local supervisor but merely annulled by the European Central Bank (ECB) upon recommendation by the respective local supervisor. License withdrawal is mainly the result of liquidity shortages where the financial institution is unable to meet its obligations towards creditors, while no short term solutions improve this situation. Another, rather unique situation is where the bank is punished for regulatory violations that often include breaches of international sanctions against corporations or individuals, or severe infringements of international anti-money laundering and counter terrorism financing regulations. The latter creates indistinctness and uncertainty that often leads to misconceptions and disappointment.

Upon its failure, the resolution authority places the financial institution under administration. The regulator or central bank appoints a special administrator to protect and maintain the interest of the bank and its creditors. This strategy aims to avoid an outflow of suspicious capital and a forced bankruptcy caused by a run on the bank. Even though retail customers do not always see the advantage of this strategy, it actually is in their best interest to protect their claims.

Bank recovery and resolution strategies

Closure of a financial institution and resolution procedures often comes as a surprise to bank customers and other creditors. They often see their facilities blocked and an announcement made on the website of the bank. This is a crucial moment that must be used to strategize accordingly. Resolution and recovery is a staged procedure with applicable conditions and timeframes. Failure to comply with these terms results in disqualification for the designated strategy. Fortunately, there are different consecutive resolution mechanisms so that creditors who are unable to meet the criteria for claim filing or miss a specific deadline may participate in another recovery strategy.

General repayment potential for bank customers includes the initial limited access to the bank account, deposit insurance and bank liquidation procedures. Alongside these ordinary actions, creditors may impose civil action and try to achieve an improved or priority position during any of the standard resolution arrangements.

Bank liquidation timeframes

This is not a very popular subject and not something most creditors want to hear. The first days of bank resolution and administration often block access to accounts and other functionalities that the bank normally provides. Within a few weeks, limited access is provided to bank customers. This may be by withdrawing maximized bank checks from the account, or the application of bridge loans and access to hardship funds. Depending on the allocated capital, these funds are open for 30 days up to 2 years. The next stage is the activation of the deposit protection scheme. In Europe, domestic DGS schemes cover up to 100.000 euro of qualified deposits. This means that deposit protection does not provide every account holder with an insurance for the deposit. The scheme if often triggered within a few weeks and a few years after the initial closure of the bank. The scheme is often open for claim filing for a 2 to 5 year period. Creditors who fail to file their claim within this timeframe lose their right of deposit protection. Payment by a DGS to qualified creditors takes place within 7 to 20 days unless further information is required to determine the feasibility of the claim. The ending of the DGS period allows for the liquidation procedures to begin. This means that it can take up to 7 years before the winding up of the bank can finally begin. It is a misconception that when the liquidation is approved and can start, repayments happen immediately. A liquidator must first collect and realize the assets, then a creditor assessment is made, and creditors must provide their proof of debt and proof of claim. After verification the first payments can be made. But, this may take some time as well.