Overview
A deposit guarantee scheme (DGS) is a statutory arrangement that protects depositors when a bank fails by repaying their eligible deposits up to a harmonised limit. In the EU the coverage level is EUR 100,000 per depositor per credit institution. Every credit institution must belong to an officially recognised scheme. By assuring retail and small-business depositors that their funds are safe, a DGS supports confidence in the banking system and helps prevent bank runs.
How it works
When a bank is unable to repay deposits, the DGS steps in to make covered deposits available to depositors within the payout period set by the framework. Schemes are funded in advance by contributions from member banks, building a fund toward a target level, and may raise additional contributions where needed. Certain categories of deposit may benefit from temporary high balance protection above the standard limit for a limited period, for example proceeds from a house sale, as provided in national law transposing the directive.
A DGS also has a role in the resolution framework. Covered deposits are excluded from bail-in and rank with high priority in the creditor hierarchy through depositor preference. Where a bank enters resolution, the DGS may be required to contribute to the financing of resolution up to the amount of losses that covered depositors would have borne had they been written down or converted, subject to caps. This links the scheme to the creditor hierarchy: the DGS effectively stands in the position of the covered depositors it protects.
Legal basis
Deposit guarantee schemes are governed by the Deposit Guarantee Schemes Directive (Directive 2014/49/EU), which sets the coverage level, eligibility, funding and payout rules. The interaction with resolution, including the treatment of covered deposits in the creditor hierarchy and the DGS contribution to resolution, is set out in the BRRD, notably the ranking provisions in Art. 108, and within the banking union in the SRM Regulation.
Relevance for banks and investors
For banks, DGS membership and contributions are a standing cost and a structural feature of the funding base. For investors in bank debt, the depositor preference that protects covered deposits pushes other creditors further down the hierarchy, which affects where losses fall in resolution or insolvency. The high ranking of covered deposits, and the DGS behind them, is a key reference point when assessing the loss-absorbing position of senior and subordinated instruments.