If the bank goes bankrupt: what customers will recover their money first?

According to the agreement reached this week by the EU’s finance ministers, the shareholders and creditors of the affected banks will have to pay the bill in case of bankruptcy

Until a few months ago, the money invested in accounts and bank deposits was untouchable and its owners were the first to recover their money before a bankruptcy. But the latest orders from Brussels no longer ensured the same in the case of deposits of more than 100,000 euros. This week, the Econfin has met and made a final decision that affects the order of priority of banking entities, according to LaVanguardia.com HelpMyCash.com.

In the early hours of last Thursday, the 27 ministers of Economy of the European Union have reached a political agreement on the rules that will distribute the losses to pay future bank rescues. This resolution could be summarized in that it will be the shareholders and creditors of the affected banks – and not the taxpayers, as has happened up to now – who will pay the bill in case of bankruptcy of the entities- Bankruptpcy-Solutions.

What happens with deposits of more than 100,000 euros?

That is the main point that was decided at the meeting. Minister De Guindos clarified that as of now “deposits of less than 100,000 euros have what we can call a super protection”, while “those with more than 100,000 also have special protection with respect to other types of bank liabilities”, as the main and subordinated debt, and the preferred ones.

In short, deposits of less than 100,000 euros are now more secure than those of more than 100,000, so the current priority order, that is, the list that indicates which customers have priority to recover their money in case of bankruptcy (with the wreck) remains as follows:

1. Accounts and deposits of less than 100,000 euros. Here there is no doubt. It is our money and it is the responsibility of the bank and the State (FGD) to keep it safe.

2. Deposits of more than 100,000 euros. The conclusion reached by the Ecofin is that “If the deposits are touched, it establishes the possibility that the rescue fund can inject the capital and there would never be losses for the deposits”.

3. Mortgage Certificates. Their holders have preference over the others because they are titles with the additional guarantee

4. Senior promissory notes and bonds. Senior debt at the same level (pari passu)

Legally, in case of bankruptcy, these 5 products – accounts, deposits, certificates, promissory notes, and senior bonds – have the same preference for collection. What distinguishes them is the guarantee. Thus, the deposits and accounts have double guarantees (from the bank and the FGD) and the mortgage bonds also have double guarantees (from the bank and the mortgages).

That said, it is difficult to say which is the number 1 between deposits and certificates, but you can place the deposits first considering your liquidity, that is, before you reach a bankruptcy, if a saver needs money, with a deposit what will recover much more easily and without suffering losses in capital.

Thus, once all the holders of senior debt had collected, they would collect the following in this order:

5. Subordinated bonds. Their name indicates that they are subordinated to the payment of the Seniors.

6. Preferred shares. Debt without return period.

7. Participatory quotas and actions. Here we no longer buy debt but shares, that is, it is an investment in capital. And investors in the capital are always the last to charge.

Finally, the Spanish minister stressed that the directive establishes “very high protection for all deposits”, sets a “common model” on how banks must deal with losses and guarantees “a protection of taxpayers’ money”.