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We have talked a lot about Swiss Banks on this blog. But we have not yet talked in detail as to what happens to your money if one Swiss Bank defaults (bankrupts).
In that case, there is a special deposit insurance for the customers of the failed bank. Even though Swiss banks are reputed very safe, they are not infallible. It is essential for customers what would happen to their bank account balance if their bank goes bankrupt.
In this article, we will cover this deposit insurance in all its details and see what people can do about that.
Swiss Deposit Insurance – Esisuisse
In Switzerland, the deposit insurance is managed by Esisuisse. This deposit insurance is also sometimes called depositor protection or deposit protection. The deposit insurance was formed in 2005. And all the regulated banks and securities brokers of Switzerland are members of Esisuisse. Even foreign banks that have a branch of Switzerland must participate in this deposit insurance.
It is a kind of system where banks would have to chip in to protect the customers from another bank that would fail.
This deposit insurance will play a role to protect the assets of the customers of a bank that would fail (bankrupt). But there are some limits in which assets are protected and how they are protected. And it also regulates how people are paid out in case of a bankruptcy.
In case of the bankruptcy of a bank member of Esisuisse, they use a three-tier system for repaying the insured amounts:
- Tier 1: Preferential Deposits
- Tier 2: Protected Deposits
- Tier 3: Bankruptcy privilege
Tier 1 – Preferential Deposits
When a bank bankrupts, all liquid assets are directly used to repay his creditors and consumers. This repayment happens in several classes. First, all the assets of the first class are repaid, then the second class, then the third until the last class.
In general, there is very little chance to be repaid in the third class at this stage. But in general, the first and second classes are small enough to be covered.
In the case of a bank, two kinds of assets are considered preferential deposits:
- Bank Account Balances per customer and per bank, up to 100’000 CHF. This money could be in a savings account or checking account. And it even applies to accounts in foreign currencies.
- Vested Benefits and Third Pillar balance per customer and per bank, up to 100’000 CHF. This amount only covers the cash in your vested benefits or third pillar, not the money invested.
These two assets are considered as part of the second class when repaying creditors. It means that these assets have a higher chance of being repaid early. It is the first kind of protection given by the deposit insurance scheme.
Tier 2 – Protected Deposits
After the second phase of bankruptcy is done, it is highly likely that not all the assets of the consumers have been paid back. It is where the deposit insurance plays a significant role.
Under the Esisuisse regulations, only one kind of asset is considered as a protected deposit: Bank Account Balances per customer and per bank, up to 100’000 CHF. This protected deposit is the first kind of preferential deposits we have seen in the previous section. It is important to note that pension funds are not protected!
So, protected deposits that have not been repaid in the first tier will be refunded by the deposit insurance itself. It means that all the banks of Esisuisse will chip in and repay the protected deposits.
Tier 3 – Bankruptcy Privilege
Finally, all remaining assets are repaid as bankruptcy claims. Again, the rules of the three classes apply. Once assets are liquidated, the first class will be paid first, then the second class, and so on.
Once again, the preferential deposits are considered privileged and are treated as a second class of claims. It means that there is a greater chance of being repaid since the second class has a higher chance of being repaid. But there is no guarantee.
Limits of the system
Now, you can imagine that repaying all the assets of a huge bank failing must be difficult. And indeed, there are limits to this deposit insurance.
The limits are related to the maximum amount of the guarantee provided by Esisuisse. And this maximum amount is currently 6 billion CHF. If the total protected deposits of the failed bank are higher than this limit, the protected deposits will not be repaid in full. This event will lower the protection per consumer based on the number of consumers in the bank if the amounts are higher than 6 billion.
The second limit is that this 6 billion guarantee is not per claim, but is a global guarantee. So, if the first bankruptcy uses four billion out of the guarantee, only 2 billion are left for a second bank bankruptcy. The guarantee is only refilled when the assets realized during the bankruptcy are returned to the banks. But this could take a long time.
The last limit is a bit more special and should not happen. Banks are required to hold half of the assets for the guarantee in liquid assets. So, only 3 Billion CHF for the deposit insurance is always available. In case this is not enough, banks are required to provide the other 3 billion out of other funds. The banks might be unable to provide these funds in case of a bad economy.
Assets above the limit
So, what happens to assets above the limit?
If you have a bank account with 125’000 CHF on it, in theory, you could get everything back. But, in practice, it is unlikely.
The first 100’0000 CHF will be considered as protected and privileged deposits. So, they should either be repaid as tier 1 or tier 2 assets. In the unlikely event of the 6 billion CHF guarantee not being enough, it is possible that less than 100’000 CHF is being repaid, but let’s assume this does not happen.
So, the last 25’000 CHF is considered a bankruptcy claim. All the assets of the failed bank will be liquidated, and the money realized will be used to repay those claims. But this 25’000 CHF will end up in the third class of claims. So the chances of being repaid are quite low.
So, in practice, it is unlikely, but not impossible, for more than the limit to be repaid.
Some people may think that the limit being per account, so joint accounts have a disadvantage. But it is not the case.
The deposit insurance is per customer. So joint accounts are considered as having two customers, each owning half of the assets. Therefore, a joint account of 200’000 CHF has the same guarantee as two individual accounts of 100’000 CHF each.
There is another tier of guarantee in the case of cantonal banks. Most cantonal banks are guaranteed by their cantonal governments. And this guarantee is unlimited.
There are currently three exceptions: The Banque Cantonale Vaudoise (BCV), the Berner Kantonal Bank (BKB) and the Banque Cantonale de Genève (BGV). These three banks have normal protection.
In case of a bankruptcy of one protected bank, the government will repay all protected and preferential deposits in full. Of course, this may later come back in the form of tax raises since this will deplete the assets of the government. But it is still a good guarantee.
What about securities?
I have only talked about cash and bank accounts in this article and for a reason. The deposit insurance does not cover securities. Esisuisse only covers deposits, and securities are deposits.
That does not mean that your securities are not safe. They may even be safer than your cash even without deposit insurance. Indeed, securities are required to be held in segregation by the bank. It means that they are held in your name, in custody by your bank. So they are entirely separated from the assets of the bank.
I will cover the bankruptcy of brokers and securities dealers in another article. The kind of protection they have is very different.
How to increase security?
There are a few ways to protect yourself against bank bankruptcy.
First, you can make sure that you are staying below the limit. For this, you should avoid having too much cash in your bank accounts. In general, this is a good idea anyway not to have too much cash since cash does not protect you from inflation. But many people have a lot of cash.
Second, the Esisuisse limit is per customer and per bank. So, you can use several bank accounts and increase the protection you could get. So, if you have 100’000 CHF in one bank and 100’000 CHF in another bank, in theory, you are protected against the bankruptcy of both banks.
And in theory, you are equally protected for the entire amount if both banks bankrupt. But as we have seen before, the protection provided by Esisuisse is limited. As such, if several banks bankrupt together or if one of the huge banks defaults, it is likely that Esisuisse will not cover all your losses.
Another idea is to deposit your assets in smaller banks. Indeed, if a small bank fails, there are more chances that the Esisuisse protection covers all the failed assets.
If you have more than 100’000 CHF in cash in a bank, you could also consider moving some of it into a vested benefits account or a third pillar. Indeed, the first 100’000 CHF in your pension funds are more protected than the money above 100’000 CHF in your bank account. If you do not have a third pillar, invest in the best third pillar.
Finally, you could favor assets held in a cantonal bank. Indeed, most of them have unlimited state guarantees. So, they are much safer than other banks. However, make sure that your cantonal bank is covered. And in the case of a bankruptcy of a cantonal, you may see a tax raise later on. But it is still probably better than to lose your assets. However, cantonal banks are generally not the best Swiss banks. But if paying a little more fees and getting a larger protection lets you sleep at night, go for it!
With this information, you should know all you need to know about deposit insurance in Switzerland. It is essential to know these facts if you will hold a large amount of money in a Swiss Bank account.
To summarize, in general, 100’000 CHF per customer and per bank are protected by the Swiss Deposit Insurance (Esisuisse). But in the case of a very large bank failing, we may still have to rely on the federal government bailing them out because Esisuisse would not be able to repay all the losses.
If you want to increase your protection, you can opt for a cantonal bank with unlimited deposit insurance by their local government. Or you could use several banks to spread the risk.
It is essential to know about this deposit insurance if you have a bank account in Switzerland. And it is especially important to know about it if you want to have a lot of cash in your allocation.
Since securities are protected by segregation, they may be safer than bank accounts. It is also important to know what would happen to your securities if your broker bankrupts.
If you want to find the best bank protected by this deposit insurance, read my article about the best banks in Switzerland.
What do you think about this deposit insurance? Are you worried about bank failures?