The BRRD specifically identifies the protection of depositors as one of the principles and objectives of resolution (Articles 34 and 31 respectively).
When a failing bank enters into resolution, a tool known as a "bail-in' can be applied to force shareholders and creditors to absorb the losses and recapitalise the bank. Depositors are always protected, whether a bank is placed under resolution or into straightforward liquidation.
In the case of a resolution:
- Covered deposits (up to EUR 100,000) are protected as they are excluded from the scope of the bail-in.
- The ordinance transposing the BRRD into French law stipulates that no depositor may incur losses greater than they would have incurred under normal insolvency proceedings (NCWO – no creditor worse off than in liquidation).
In the case of a liquidation, depositors are also protected:
- Deposits of up to EUR 100,000 are protected by the deposit guarantee scheme, and reimbursed from a fund previously built up using contributions from financial institutions.
- Depositors are given a preferential ranking in the hierarchy of claims, and are thus reimbursed before ordinary creditors: amounts covered by the deposit guarantee scheme (up to EUR 100,000) are given a high ranking, followed by any amounts in excess of this threshold. Depositors are the last to be asked to make a contribution in the event of a resolution (after holders of capital shares and debt securities).
Hierarchy of creditors for the bail-in tool
Article L. 613-30-3 of the Monetary and Financial Code modified the hierarchy of claims for credit institutions, placing depositors even higher up in the ranking. This makes it easier to apply the bail-in tool and provides depositors with greater protection. Credit institutions can also issue a new category of debt securities which absorb losses after subordinated debt instruments and before preferred liabilities.