Whether or not a credit institution permanently fails is determined by the domestic resolution authority in collaboration with the statutory administrator of the bank. To provide liquidity to retail creditors and small business owners and avoid the disruption of the payment system, a deposit guarantee scheme prepays insured deposits up to the specified limits. The scheme is primarily used as a paybox function to repay eligible bank account holders and creditors pursuant to the domestic regulation. After DGS claims are approved and repaid to creditors, the scheme takes over the position of eligible creditors for the reimbursed amounts in the liquidation procedures. The remaining account balance, if any, is subject to other recovery and resolution initiatives and include collective civil action.
DGS claim submission terms are laid down in domestic regulation. The scope and nature of the scheme is dependent on the local economy and its financial sector since these determine the levels of protection needed. In general, deposit insurance funds are external schemes managed by independent committees accountable to its Ministry of Finance. Supervised financial institution are required to participate in the scheme. They pay premiums based on the customer risk profile and outstanding eligible deposits. Similar to traditional insurance, the fund calculates the likelihood of failure and activation of the scheme and the reserves it must maintain to cover eligible deposits under the scheme.
Premiums paid by member institutions to cover the failure of one of the participants of the deposit guarantee scheme are kept intentionally low. This is justified by the aggregated transfer of the insured claims of the account holders to the deposit guarantee scheme. The scheme then becomes a claimant in the bank liquidation procedures and holds a prioritized position in the domestic creditor hierarchy. As a result, a realistic and fixed claim of the scheme must be determined prior to the bank liquidation procedures start.
There is a Catch22 situation when it comes to the time constraints for DGS claim submission and the start of the bank liquidation procedures. In most distressed bank situations statutory administration, deposit protection and bank liquidation operate in consecution. These individual stages can only begin when the previous one has ended. The result is that deposit guarantee claims can only be submitted while the scheme is open. Claims submitted outside the timeframe of the scheme are instantly rejected and creditors who fail to submit their claim in time lose their ‘right’ to claim. Their claim is handled during the liquidation, or via collective civil action. The question whether creditors can still submit a DGS claim after the fund closes is short, simple and negative: it cannot!