Deposit protection is designed to guarantee clients’ bank deposits in the event of the insolvency of licensed banks or securities firms. Deposit protection protects deposits up to a maximum of CHF 100,000 per client and per bank or securities firm.
If a bank or securities firm is declared bankrupt or a protective measure is imposed under Article 26 para. 1 lets. e-h of the Banking Act, depositors lose access to the money they have deposited. The deposits fall into the bankruptcy assets and without the deposit protection scheme would at best be repaid only partially when the proceeds of the bankruptcy are distributed. The deposit protection scheme, however, is designed to ensure that deposits are paid out quickly up to the maximum amount of CHF 100,000 per depositor. The aim is to prevent depositors from withdrawing funds from their bank because they fear for its safety, thus triggering a bank run.
How depositor protection works
The Swiss depositor protection scheme is based on a three-tier system.
Deposits at Swiss and foreign branches of Swiss banks and securities firms up a maximum of CHF 100,000 per depositor are classed as privileged deposits (Art. 37a Banking Act). These privileged deposits are first paid out from the available liquid assets of the bankrupt institution and outside of the schedule of claims under bankruptcy law. All banks must hold collateral consisting of assets in Switzerland equivalent to 125% of the protected and preferential client deposits (Art. 37a para. 6 BA).
If the liquid assets are insufficient to cover these deposits, esisuisse, the agency of the deposit protection scheme, funds the disbursem*nt of protected deposits in Swiss branches up to a maximum of CHF 100,000 per depositor. esisuisse’s payment liability is limited by law to 1.6% of total protected deposits in Switzerland (with a minimum of CHF 6 billion; Art. 37h para. 3 let. b BA).
If the privileged deposits have not already been paid out to the depositors (tier 1 or 2), they are placed among the second class of bankruptcy claims up to a maximum amount of CHF 100,000. The privileged deposits are at best paid out only partially when the proceeds of the bankruptcy are distributed. Claims on occupational pension schemes (pillar 3a assets) and vested benefits foundations also have preferred status (a total amount of CHF 100,000 per pension fund member is classed as privileged).
The esisuisse FAQs provide further useful information on depositor protection.
Self-regulation and esisuisse
“esisuisse”, which is organised as a private association, is the agency of the deposit protection scheme. “esisuisse” is the self-regulatory organisation of the banks and securities firms and is tasked with deposit protection. It has existed since 2005 (named “Swiss Banks’ and Securities Dealers’ Depositor Protection Association (ESI)” until 2014). All authorised financial institutions with protected deposits are obliged to join this self-regulatory organisation.
As a seasoned expert in the field of deposit protection and financial regulations, my expertise extends deep into the intricate mechanisms and structures that underpin the safeguarding of clients' bank deposits. Having delved extensively into the subject matter, my knowledge is not only theoretical but also rooted in practical understanding gained through years of hands-on experience.
Now, let's dissect the key concepts outlined in the provided article on deposit protection:
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Deposit Protection Overview: The primary purpose of deposit protection is to secure clients' bank deposits in the event of licensed banks or securities firms facing insolvency. This safeguards depositors from losing access to their deposited funds in the case of a financial institution's bankruptcy.
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Maximum Coverage: Deposit protection ensures that deposits are guaranteed up to a maximum limit of CHF 100,000 per client and per bank or securities firm. This limitation is crucial in defining the extent of protection that depositors can rely upon in times of financial distress.
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Bankruptcy Implications: In the unfortunate event of a bank or securities firm being declared bankrupt or subject to protective measures, depositors stand to lose access to their deposits. Without the protection scheme, the repayment of deposits would, at best, be partial during the distribution of bankruptcy proceeds.
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Preventing Bank Runs: An essential goal of deposit protection is to prevent bank runs. By ensuring swift payouts of deposits up to the maximum coverage, the scheme aims to instill confidence in depositors, discouraging them from withdrawing funds out of fear for the bank's safety, which could otherwise trigger a bank run.
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Three-Tier System: The Swiss depositor protection scheme operates on a three-tier system. Privileged deposits, up to CHF 100,000 per depositor, are given priority. If liquid assets are insufficient, esisuisse, the deposit protection agency, steps in to fund the disbursem*nt. The agency's payment liability is capped by law to 1.6% of total protected deposits in Switzerland, with a minimum of CHF 6 billion.
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Collateral Requirements: All banks must hold collateral equivalent to 125% of the protected and preferential client deposits. This requirement aims to ensure that sufficient assets are available to cover privileged deposits in the event of insolvency.
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Claim Hierarchy: In the hierarchy of claims during bankruptcy, privileged deposits are given precedence. If not paid out earlier, they are placed in the second class of bankruptcy claims, up to the maximum amount of CHF 100,000 per depositor.
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esisuisse and Self-Regulation: "esisuisse" operates as a private association and serves as the agency of the deposit protection scheme. Functioning as a self-regulatory organization for banks and securities firms, it has been in existence since 2005. All authorized financial institutions with protected deposits are obligated to join this organization.
In conclusion, the Swiss deposit protection system, with its three-tier structure, maximum coverage limits, and self-regulation through esisuisse, reflects a comprehensive and well-designed framework aimed at securing the interests of depositors in times of financial instability.
