What is bank deposit protection?
Financial institutions are at the core of society. Payments are made into IBAN or bank accounts to support personal living standards. Whilst a large portion of assets held in bank accounts are used in the real economy, some is accumulated on savings accounts and for investment purposes. The financial system is build on trust. As such, financial institutions and banks can lend out more money than they have on account. This only works because of the assumption that not every creditors wants to collect his full deposit at the same time. Panic and bank runs thus need to be avoided. One of the tools for regulators to maintain public confidence is the system of bank deposit protection for qualifying creditors and their investment.
Bank deposit protection provides creditors with a capped insurance over their deposit. In the USA the maximum coverage via the FDIC is 250.000 USD. Its European equivalent, the domestic DGS covers 100.000 Euro, and in the UK the FSCS compensates up to 85.000 GBP. Designated schemes seek to maintain public confidence in the financial system. As such, not every deposit is protected. For a detailed explanation and to understand the exclusions for coverage, please read this article on European deposit guarantee claims.
The term deposit guarantee is a bit confusing because it alleges that all bank deposits are guaranteed. This is however incorrect. To understand the scope and coverage of deposit protection, the foundations of the financial system are crucial. Smaller creditors need to keep access to their account balances to avoid severe disruption of their standards of living. For multinationals, public authorities and financial institutions, alternative safety nets and different approaches for risk and recovery are available. Therefore, deposit protection is mainly a safeguard to keep the economy going while large scale repayment happens at a later moment.
Filing a claim with the bank deposit protection scheme is merely an administrative task. The scheme administration must verify the legitimacy of the DGS claim and therefore asks for specific evidence from the claimant. This evidence does not relate to the corporate activities per se. It however may be required to submit further supporting evidence when there is indistinctness in relation to the possible disqualification of the claimant under the DGS guidelines and directives.