What it is
Depositor preference is the principle that deposits rank ahead of ordinary unsecured claims in the creditor hierarchy. Under the EU framework, this preference is tiered: covered deposits, and the deposit guarantee scheme subrogated to them, hold the highest priority, followed by the uncovered portion of eligible deposits from natural persons and small and medium-sized enterprises, followed by other deposits and ordinary senior claims.
The effect is that when losses are imposed, whether in insolvency or through bail-in, depositors are among the last senior creditors to be affected, and the most protected depositors are effectively insulated because covered deposits are excluded from bail-in altogether.
How it works
The hierarchy operates in two connected settings. In national insolvency, the ranking determines the order in which claims are paid from the estate. In resolution, the same ranking governs the sequence of write-down and conversion under the bail-in tool and anchors the counterfactual used for the no-creditor-worse-off assessment.
Covered deposits, those protected up to the guarantee limit, are excluded from bail-in, and the deposit guarantee scheme steps into the depositor's position. Eligible deposits of individuals and smaller enterprises above the coverage limit hold a preferential rank below covered deposits but above ordinary senior liabilities, which reduces the likelihood that they absorb losses.
Legal basis
Depositor preference is established by the creditor hierarchy provisions of the BRRD, which set the ranking of the different deposit tiers relative to other unsecured claims. The definition and protection of covered deposits, and the role of the deposit guarantee scheme, are set out in the Deposit Guarantee Schemes Directive. The exclusion of covered deposits from bail-in follows from the BRRD bail-in framework.
Relevance for banks and investors
For banks and their resolution planning, depositor preference concentrates loss-absorption on instruments ranking below deposits, which is one reason MREL is built from own funds and subordinated or non-preferred debt rather than deposit funding.
For investors in bank debt, depositor preference is a structural feature of the waterfall: because deposits sit above ordinary senior claims, the presence of a large preferred-deposit layer affects how far down the hierarchy losses must travel before reaching senior instruments. For depositors, it reinforces that protected balances are shielded from resolution losses.