The closure of a bank or limitations to access a bank account always come unexpected. This triggers ambiguity and uncertainty for creditors. Regulators try to resolve the matter in a swift and orderly manner to avoid panic and a bank run. A variety of tools and measures allow for early intervention and a smooth transition. Yet not all bank failures allow for a (partial) reopening of activities and sometimes administration followed by liquidation is the only option.
To validate the legitimacy of claims against the bank or its estate, the contract between the bank and its customer prevails. This understanding is governed by contract- and banking law. Following contract law, both parties are allowed to cancel the agreement under the terms agreed. However, justification for this termination is often tested in the commercial court and thus results in case law or jurisprudence. With the termination of the banking contract, the customer waves his future rights against the bank unilaterally. Termination of the contract does not refrain the bank from taking legal action to recover outstanding debts. This is adverse for the situation where a bank is failing or likely to fail and the customer issues a demand draft for repayment and account closure notice. A failing bank is often placed under external administration or resolution and therefore not able to honor the demand draft but can complete the account closure and thus ending the contract at the customers request.
Establishment of the contract between the bank and a customer, starts with identifying the customer. The bank can only owe duties of care and fiduciary duty towards a client. Such a critical prerogative is important because a bank deposit legally and beneficially belongs to the bank and not to the account holder. The law of agency furthers the duties of the bank against its customer. The result is that the essence of the contract between the bank and the customer is the right of the bank to use deposits for its own purposes and its undertaking to repay an amount equal to that deposited. The commercial nature of the agreement between the bank and its customer therefore includes risk. The customer must be aware that a surplus on account above the insured amount via a domestic deposit protection scheme (DGS), is considered risk capital and subordinated after the secured creditors.
A bank under administration by a central bank or regulator can impose capital controls and limit the periodic withdrawal potential until there is a resolution. A next procedural step is either to sell the viable parts of the bank and repel the unhealthy business units, or to start dismantling and winding up the bank. To stabilize customer confidence, the deposit protection scheme is triggered for qualifying creditors covering account balances up to the insured amount. Unsecured and subordinated creditors, and holders of Tier 1 equity and Tier 2 debt further rely on a liquidation to be compensated.
Claim filing processes follow a strict creditor hierarchy and therefore after the court approves a liquidation, creditors are treated equally per isolated payment sequence. The outcome is that only after the costs of the liquidation, the DGS advances, outstanding tax claims, staff members and regulatory fines are paid in full, the senior unsecured liabilities like bank deposits above the insured amount, are paid from the remainder.
Deposit protection can differ slightly per country. The result is that coverage is not always uniform, and creditors need to be well prepared when filing their claim under the DGS. It is a misconception that a DGS covers all bank deposits. Exclusions are addressed in respective laws or refer to specific overarching directives.
Where creditors feel wronged about the way their financial adviser handled their case and a dispute remains unsolved, the financial ombudsman can settle and solve these matters in a fair and impartial way. Decisions of the ombudsman are fair and reasonable for the particular circumstances of the case, whilst considering a variety of appropriate industry practices and rules.
Depositors and investors involved in a bank failure need to consider that claim filing processes do not provide any second chances or corrections of earlier claims. Money that is approved for reimbursement by an administrator or liquidator is unlikely to be returned when creditors fail to file their proof of claim and proof of debt accordingly. Our efforts to ensure maximum compensation for our clients allows us to group creditors and work in a cost-efficient and effective way. Therefore, creditors are invited to contact us for guidance in the different stages of the claim filing process.