What it is
Covered deposits are the portion of eligible deposits protected by a deposit guarantee scheme up to the harmonised coverage level of EUR 100,000 per depositor per institution. They represent the most protected class of bank liabilities: they are excluded from the scope of bail-in, and they hold the highest priority in the creditor hierarchy among deposits.
Eligibility turns on the definition of eligible deposits, which excludes certain categories such as deposits of financial institutions and public authorities. The covered amount is the guaranteed slice of eligible deposits; any balance above the coverage level is uncovered and treated differently in the hierarchy.
How it works
If an institution fails, the deposit guarantee scheme reimburses covered depositors up to the coverage level, and the scheme is subrogated to their claims against the estate. Because covered deposits are excluded from bail-in, they cannot be written down or converted; instead, the deposit guarantee scheme may contribute to resolution financing in place of the losses covered depositors would have borne, subject to limits and to the no-creditor-worse-off safeguard.
Covered deposits also anchor the top of the depositor-preference ranking. Their exclusion from bail-in and their senior position mean that the loss-absorbing burden in resolution falls on instruments ranking below them, from own funds up through subordinated and senior debt and, only in extremis, uncovered deposits of large corporates and other senior claims.
Legal basis
The definition, eligibility and coverage level of covered deposits are set out in the Deposit Guarantee Schemes Directive, which harmonises protection at EUR 100,000 and defines eligible deposits. Their exclusion from bail-in and their ranking in the creditor hierarchy are established by the BRRD, including the depositor-preference provisions.
Relevance for banks and investors
For banks, covered deposits are a stable, protected funding base, but they cannot count towards loss-absorbing capacity because they are excluded from bail-in. Their size influences how much MREL an institution must hold in bailinable form.
For investors in bank securities, covered deposits define the floor of the loss-absorption stack: because they are excluded and rank highest, losses must be allocated to every other class before they could be reached, which in practice they are not. For depositors, the coverage level is the concrete assurance that balances up to EUR 100,000 are protected regardless of resolution outcome.