#64 What bank failures mean for depositors and investors

A look back at history shows that even banks with seemingly sound business models can fail. For example, the Spar- und Leihkasse Thun collapsed following the mortgage crisis in the fall of 1991. This led to a «bank run» in which many customers lost money. Although capital and liquidity regulations have been tightened since then, more recent events show that banks can still falter. There is no reason to assume that this will not happen again.

Essentially, a balance in a personal or savings account is a claim against the bank. As a creditor, you depend on the bank, as the debtor, remaining solvent. With this in mind, it is helpful to understand how well your account balances and securities are protected in the event of bankruptcy.

Deposit insurance: limited protection

In Switzerland, the deposit insurance scheme «Esisuisse» is designed to ensure that customers have access to their money in the event of a bank bankruptcy. Currently, deposits are insured up to a maximum of 100'000 Swiss francs per person and per bank – at least in theory. This system is financed by contributions from all banks with a branch in Switzerland, which are required to be members of Esisuisse. Deposit protection also applies to foreign banks with branches in Switzerland.

However, this protection is not unlimited. In the event of bankruptcy, Esisuisse can claim a maximum of 7.9 billion Swiss francs from its members. This amounts to only about 1.6 percent of the insured deposits in Switzerland. Critics therefore refer to it as «fair-weather insurance.» If a systemically important bank were to go bankrupt, this sum would be far from sufficient. Even the failure of a medium-sized bank could push the system to its limits.

Which creditors are paid first in the event of bankruptcy?

If bankruptcy actually occurs, the liquidation proceeds are distributed among the creditors. A so-called collocation plan is applied, which determines the order of claim satisfaction. For you as a customer, this means you are far down the line. For example, employees’ wages, guaranteed bonuses, and social security contributions are paid first.

What happens to my securities in the event of bankruptcy?

The type of your investments is decisive. Securities and physical assets such as gold bars in a bank safe deposit box are so-called special assets. These are merely held in trust by the bank and remain your property. They are not part of the bank’s balance sheet and therefore do not fall into the bankruptcy estate.

Structured products are a more delicate matter. These debt instruments represent claims against the issuing bank. In the event of the issuer’s insolvency, they become part of the bankruptcy estate. Example: You are a client of Bank A and purchase a structured product from Bank B with the underlying assets Roche and Novartis. If Bank B goes bankrupt, your investment is at risk – even if your primary bank and the two pharmaceutical stocks are performing well.

By the way: Separate rules apply to pension funds, such as those in pillar 3a or in a vested benefits account.

Do you know what portion of your assets is sitting somewhere on a bank’s balance sheet? Send me an email.