A bank liquidation can be compared with standard bankruptcy procedures where assets and liabilities are matched, and the losses are taken by creditors and shareholders. When the bank is able to continue (parts) of its activities, a bail-in of debt is possible to restructure the financial status of the organization. This restructuring is often needed to fulfil the mandatory regulatory capital requirements. In both procedures, bank depositors may jeopardize their account balance. It is therefore mission critical to get a clear understanding of what is about to happen and to utilize all the available recovery options to its full capacity.
The closure of a financial institution and the lack of access to the critical functions of the bank almost always overwhelm uninformed account holders and other creditors. These must realize that bank closure is a serious matter that requires close attention to the administrative procedures of asset and fund recovery.
Staged recovery in bank failure
Bank recovery and resolution is a regulatory approach that combines several actions to maintain confidence in the financial system, while protecting the public interest simultaneously. This means that incentives for risk taking and moral hazard are reduced, and that tax payer input is exceptional. The combination of regulatory interference and local frameworks often allows for several isolated routes for recovery. Answering the question how much value of deposits is returned in a bank liquidation therefore depends on its benchmark and how matters are organized.
Creditors must realize that bank liquidation is only the final stage of the resolution process. At first, right after the resolution decree announced the administration and closure of the bank, customers often get restricted access to their accounts. This may be in the form of OTC bank checks, capped online banking services, or capital controls. All of which have the potential to repay parts if not all of the account balance. When the local regulator or resolution authority secures its resolution plan, the deposit guarantee scheme is activated. Deposit protection covers up to 100.000 Euro in Europe, 250.000 in the USA, and 80.000 GBP in the UK. For most creditors and account holders, the combination of deposit protection with capped early access resolves the issues and provides for a full repayment. For creditors who still have an outstanding balance and valid claim to the bank, liquidation is their last resort.
Bank liquidation success for creditors
Alongside the before mentioned early intervention measures and deposit protection payments, bank liquidation is considered a third pillar for repayment after bank failure. Obviously, creditors may take individual legal action towards wrongdoers. Yet, such actions depend on the personal situation of the client and the causality between the actions of the bank and its management, and the loss of money. It is premature and case dependent whether this leads to recovery. Therefore, the answer to the question how much of a deposit is returned in a bank liquidation is best restricted to the applicable resolution actions.
The amount of protection under the local deposit guarantee scheme is capped to a maximum. The surplus above the insured amount is considered risk capital, subject to recourse via bank liquidation. Depending on the asset-liability mismatch, and the creditor hierarchy, bank depositors and other creditors often see a write-down of their outstanding claim. This often leads to severe losses for creditors. It is difficult to estimate true losses in bank liquidation since the underlying reasons for failure are complex and unique. As such, creditors should always investigate all possible routes of recovery to limit such risks.