What happens if a bank takes your money?
When you put your money in the bank, you expect it to be safe. But what happens if your bank goes bust? Your money is safe and sound, right? Wrong! Unfortunately, this has happened all too often in recent history. In the aftermath of the global financial crisis, 184 banks went bankrupt in Europe alone. The good news is that depositors lost their money only temporarily.
Governments and central banks were able to adopt measures for fast and effective assistance for these financial institutions so that they could return to viability without customers losing their money. The bad news is that, if things go badly, you could lose some or all of your savings . . .
Banks go bust
Banks can go bust for many reasons. They can make bad business decisions or miscalculate risks and end up with insufficient capital. They can be hit by a drop in the value of their assets, a fall in their income or an increase in their outgoings, such as salaries and other expenses.
Some banks have extensive loan portfolios and may have trouble when debtors cannot pay back the loans. This can happen when there is a significant economic downturn and people lose their jobs and are therefore unable to repay their loans.
Banks can also go bust because of misconduct, such as misrepresenting their financial situation. Banks have a duty to ensure that all the money deposited with them is safe and will not be lost. The risk of a bank going bust therefore always exists, but it is low in countries with a sound regulatory and supervisory framework.
This means that banks are well capitalized and financially sound. They have enough money on hand and can withstand unexpected events without becoming insolvent.
Your money is no longer safe in the bank
If a bank runs out of money, it cannot repay what it owes. If the bank is a member of an inter-bank payment system, it cannot transfer funds to other banks. This is called default on payment. If a bank is no longer able to pay its liabilities, it goes bankrupt. In this case, the central bank or a government body will take over the bank.
They may put the bank into temporary care or even liquidation. This means that the bank is closed down and all its assets are sold off. The proceeds from the sale are used to repay the depositors. This means that, in some cases, you as a depositor may lose some or all of your savings.
EU deposit guarantee
The EU Deposit Guarantee Scheme (DGS) protects the depositors of banks that are members of the scheme. It guarantees the deposits in the event of a bank failure, including those with a maturity of up to €100,000. This means that you do not lose any money if your bank goes bust.
The scheme was introduced in 2001 as a result of the financial crisis that threatened many banks and led to a large number of bank failures. The scheme is financed by contributions from the banking sector. The amounts vary by country, depending on the risk level of each country’s banking system. The higher the risk, the more that banks pay into the scheme.
In order to qualify for the protection provided by the scheme, the customer must be informed of the right to claim the deposit guarantee and be required to confirm that this right has been exercised. The customer must also be informed of the time limit for claiming the deposit guarantee.
The DGS provides protection for current accounts and deposits with a maturity of up to six months. It does not cover long-term deposits, savings accounts, stocks and bonds, or money on account.
Credit Guarantee Scheme – a temporary safeguard
If a bank is unstable but does not officially qualify for the EU deposit guarantee scheme, the central bank may step in and provide a credit guarantee scheme. This is a temporary precautionary measure and applies only to individual banks or groups of banks.
The credit guarantee scheme provides protection for banks that have a high risk of default on payment. It covers a portion of their payment obligations to other banks. This means that other banks have less to fear if a particular bank cannot transfer funds as agreed.
The credit guarantee scheme is a temporary measure that can be taken in exceptional circumstances. It can be used to prevent a major disruption in the inter-bank payments system. This would otherwise arise if a bank or a number of banks are unable to repay their obligations to other banks.
The credit guarantee scheme is financed by banks. The amount of money that a particular bank has to pay into the scheme depends on the bank’s risk level.
Bank Recovery and Resolution Directive (BRRD ) - a last resort
If a bank fails, a special process is followed to ensure that depositors do not lose their money. The Bank Recovery and Resolution Directive (BRRD) is the EU legislation that deals with the resolution of banks and other financial institutions that are in difficulty.
The Directive was adopted in 2014 and entered into force on January 1, 2016. It replaced the previous legislation and introduced major changes. The new rules aim to minimize the cost of financial assistance to the taxpayer and speed up the restructuring or resolution of banks.
The aim of the new rules is to ensure the continuity of critical financial services and protect depositors’ savings even in the event of a major bank failure. The BRRD applies to all EU banks, credit institutions and investment firms.
They must have a resolution plan in place at all times. This plan must cover all the possible scenarios that may lead to the bank’s failure. If a bank runs into financial trouble, its management has to apply the resolution rules and procedures on a case-by-case basis.
Have your money ready to be withdrawn immediately!
When the bank runs into financial trouble, the first step is often to refuse to repay money that has been deposited or lent. You can expect to hear from your bank that you must wait longer for a loan repayment or that your savings account has a lower interest rate.
You can also see that the bank’s financial condition worsens and that its financial situation deteriorates. In such a situation, you must be prepared to withdraw your money from your account as quickly as possible. One option is to open an account in a different bank.
If a bank is in financial trouble, it may start to experience a shortage in cash. This happens when there are not enough funds in the bank to cover the money that depositors demand as repayment. A shortage of cash can also occur if the bank has borrowed a great deal of money from other banks or financial institutions.
A shortage of cash can be addressed by depositors who are concerned about the bank’s health depositing their money in other banks. This is what happened in Spain in 2012. The shortage of cash led to long queues outside banks. Many people were concerned that their savings would be lost if the bank went bankrupt.
Final words: Stay informed and have your money somewhere else!
If a bank is in financial trouble, it may also decide to reduce or increase the amount of money that it keeps in reserve. This is known as the liquidity ratio. A bank may decide to reduce the amount of money in reserve if it is in financial trouble.
This is dangerous because it means that banks have less money to repay their depositors. Therefore, you must keep the bank’s financial health in mind. If you discover that the bank is in financial trouble, immediately withdraw your money.
There are many ways to protect yourself against financial risk. The most important thing is to stay informed and be aware of the financial health of your bank. There is no guarantee that a particular bank will never become insolvent, but there are prudent steps you can take to minimize your risk
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