Swiss Deposit Insurance – When a Bank goes Bankrupt| Updated: |
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We have talked a lot about Swiss Banks. But we have not yet discussed what happens to your money if one Swiss Bank defaults (bankruptcy).
In that case, there is special deposit insurance for the customers. While+ Swiss banks are considered 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 cover this Swiss deposit insurance in all its details and see what people can do about that.
Swiss Deposit Insurance – Esisuisse
In Switzerland, 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. Foreign banks with a branch in Switzerland must participate in this deposit insurance.
It is a 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 in protecting 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 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 goes bankrupt, all liquid assets are used to repay its 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.
At this stage, there is very little chance of being repaid in the third class. 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 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 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 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 first phase of bankruptcy, not all the assets of the consumers have likely been paid back. It is where deposit insurance plays a significant role.
Under the Esisuisse regulations, only one asset is considered a protected deposit: Bank Account Balances per customer and bank, up to 100’000 CHF. This protected deposit is the first kind of preferential deposit 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 8 billion CHF. If the total protected deposits of the failed bank exceed 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 exceed 8 billion.
The second limit is that this 8 billion guarantee is not per claim but is a global guarantee. So, if the first bankruptcy uses five billion out of the guarantee, only three 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 must hold half of the assets for the guarantee in liquid assets in a third-party custodian bank. So, only 4 Billion CHF for deposit insurance is always available. Banks must provide the other 4 billion out of other funds if this is insufficient. The banks might be unable to provide these funds in 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 protected and privileged deposits. So, they should be repaid as tier 1 or 2 assets. In the unlikely event of the 8 billion CHF guarantee not being enough, it is possible that less than 100’000 CHF will be 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.
In the past, joint accounts were considered to have two customers, so the protection would be double. But as of January 2023, joint accounts are considered a group of individuals with the protection of 100’000 CHF.
Since a joint account is considered a group of individuals, a couple can get more protection with three accounts:
- A joint account
- A personal account per person
In that case, for a couple, you could get 300’000 CHF in protection.
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 the bankruptcy of one protected bank, the government will repay all protected and preferential deposits in full. Of course, this may come back in the form of tax raises since this will deplete the government’s assets. 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 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. You should avoid having too much cash in your bank accounts. In general, this is a good idea 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 can 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 go bankrupt. But as we have seen before, the protection provided by Esisuisse is limited. As such, if several banks go bankrupt together or if one of the huge banks defaults, Esisuisse will likely 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 losing your assets. However, cantonal banks are generally not the best Swiss banks. But if paying more fees and getting larger protection helps 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 be unable to repay all the losses.
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?
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13 thoughts on “Swiss Deposit Insurance – When a Bank goes Bankrupt”
According to esisuisse it seems from Jan 1st 2023 the rules for joint accounts have changed and depositors are now lumped together with a total protection of CHF 100,000. So I would assume this applies to a married couple with a joint account?
Thanks for sharing. You are correct, joint accounts will now have less protection than two separate accounts. However, a joint and two separate accounts will now have more protection. I will have to update articles.
This will apply to any joint account, not only to married people.
Thank you, Baptiste
Another great review which is extremely helpful. I am very concerned about Credit Suisse and am exploring options as a result.
How much exposure do you have to Credit Suisse?
Very good post. I had no idea on the protected amount and it is indeed way more interesting and complex than I thought! Thank you
I am glad you found it interesting :)
Thanks for stopping by!
I have been following your articles and this again is a nice one. One thing that may be missing is what happens to the loans one has with a bank that files for bankruptcy.
If you have a loan with this bank, it’s an asset on the balance sheet of the bank. These assets will either be distributed among the creditors of the failed bank or liquidated and the results of the liquidation given to the creditors.
A mortgage for instance will sold to another bank in Switzerland. In this case, the conditions of the loan should remain the same. But the conditions may change at the next renewal of the loan.
There may be different rules in cases of different loans, but that’s the general idea. In any case, you won’t get free money, you still owe the money, but the lender may change.
Does that make sense?
This kind of article reminds me why I prefer to invest my money in real estate rather than keep it in bank accounts (except that it doesn’t pay anything).
BTW, who leaves so much money in a bank account? :)
Yes, it’s better to avoid having too much cash!
Thanks for stopping by!
Thanks for the informative summary as usual.
Another point specific to Swiss banks is metal accounts (gold, silver, platinum etc.).
As far as I can tell, these accounts benefit from no bankruptcy protection.
The difficulty is determining how much of a gamble it is to hold significant balances in such accounts.
From what I have read on esisuisse, it seems indeed that they are not covered. There seems to be an exception if the rules of the bank indicate a possible payment in money (FAQ).
But I do not really see when this rule would apply.
I would think it’s riskier than having a Gold ETF.
Thanks for stopping by!