In Switzerland, customer assets – also called deposits – are at least partially protected from the possibility of bank failure. The “deposit protection” scheme provides a measure of protection for deposits in Swiss banks made by actual people or other legal entities residing in Switzerland or outside of the country. Deposits made by other banks or by securities brokers do not benefit from the same level of security.
Depositor protection for customers of Swiss banks
According to Swiss financial supervisory authority FINMA, deposit protection in Switzerland works on a three-tier structure: Firstly, the failed bank’s liquid assets are distributed to depositors of preferential deposits. Secondly, depositors are protected by an additional depositor protection scheme. Thirdly, depositors enjoy privileged status during bankruptcy procedures.
The level of protection which you as a depositor receive on all three levels is limited to a maximum repayment. Ahead of the financial and banking crisis of 2008, the maximum was just 30,000 francs. In 2008, that level of protection was raised to 100,000 francs per person (per bank).
Both non-privileged deposits and privileged deposits (preferential deposits) above the maximum repayment are not covered by special bankruptcy protection and therefore fall into the “third priority” category (so called third creditor class) during bankruptcy procedures.
First level security: privileged withdrawal
Initially, depositors will receive a repayment of up to 100,000 francs of their preferential (privileged) deposits from the insolvent bank’s liquid assets as promptly as possible.
The bank must make this repayment immediately without seeking any alternative form of settlement. This means that if you have both preferential deposits and debt (a mortgage, for example) at the same bankrupt bank, the bank cannot take your debts into account when repaying your deposits. You enjoy the same privileged status as customers who do not owe any money to the bank.
Second level security: deposit protection
If the failed bank does not have enough liquid assets to make at least the minimum required repayment of preferential deposits to its customers, certain deposits may also be covered by deposit protection. This guarantee insures that preferential deposits are repaid, up to the limit of 100,000 francs per customer. The Federal Council has the authority to adapt this maximum repayment limit if it sees fit.
Deposit protection is limited to a maximum of 6 billion francs in total payouts. That does not pose a problem for customers of small banks which manage less than 6 billion francs worth of covered assets. But the failure of a large bank would quickly reach the limits of the deposit protection scheme.
Third level security: bankruptcy privilege
If deposit protection is insufficient, a bankruptcy privilege comes into play. Up to 100,000 francs of privileged deposits per bank customer benefit from preferred “second priority” status during the ensuing bankruptcy procedure. Only “first priority” claims, meaning salary claims made by employees of the failed bank, have a higher repayment priority.
Being second in line during bankruptcy proceedings greatly increases your chances of being repaid. The list of creditors in the “third class” of bankruptcy is usually very large, and in many cases, not all of these creditors can be repaid.
Different deposit types are handled differently
Deposit protection can vary depending on the type of deposit in question.
Medium term notes (bank bonds) and assets held under your name are both privileged and protected. These include deposits of up to 100,000 francs per bank customer and bank, which are held in checking accounts, savings accounts, investment accounts and business accounts. In the case of privileged foreign currency accounts, deposits will be calculated in Swiss francs for the purpose of repayment.
Vested benefits (vested benefits accounts) and assets held in pillar 3a retirement savings accounts are privileged, but not protected. The deposit protection guarantee does not apply to these deposits. However, these deposits do fall under the second bankruptcy class, so in the best case the assets held in your vested benefits or pillar 3a account will be repaid, up to a maximum of 100,000 francs. This maximum repayment limit does not affect the maximum repayment of any other types of deposits held at the failed bank.
What happens to securities when a bank fails?
To clear up a common misconception: Securities like shares and bonds are not categorized as deposits. They are not privileged nor are they protected by the depositor protection scheme. However, investors who hold securities in an investment account have nothing to worry about. Securities are segregated assets and remain in your possession after a bank failure. They can simply be transferred to another bank.
Exception: Structured products are normally vulnerable to bank failures. Securities issued by the insolvent bank (shares in the bank, for example) are also exposed. If you agreed to securities lending in your contract, you may be at risk of losing your securities if your bank fails. A securities lending agreement allows a bank to lend your shares to third parties.
Investment funds and ETFs are also segregated assets. They are not liquidated along with bank assets during bankruptcy procedures. But here too, there are exceptions: If your funds are built on structured products like swaps, you risk losing them if the bank fails.
Deposit protection in practice
This concrete example helps clarify the protection you receive in the event of a bank failure: Let’s say you had total deposits worth 300,000 francs at a Swiss bank. 50,000 francs worth of deposits were in your 3a retirement account. Another 100,000 francs were in your vested benefits account, while a further 150,000 francs of deposits were tucked away in your savings account. The bank is not state-guaranteed, but as a member of Esisuisse it is covered by depositor protection.
If the bank went bankrupt, the following would happen: A 100,000-franc portion of the assets in your 3a retirement account and vested benefits account – in addition to 100,000 francs of the money in your savings account, will be assigned preferential status. Plus, the 100,000-franc portion of what you had in your savings account is protected by the depositor protection.
So of your 300,000 francs, 200,000 would be classified as preferential deposits, and of that, 100,000 francs would not only be privileged, it would also be protected.
State guarantee: additional protection for cantonal banks
Customers at most cantonal banks not only benefit from Federal deposit protection, but also from a state guarantee provided by the canton. So residents of the Canton of Zurich, for example, bear liability for the deposits made by Zürcher Kantonalbank customers.
All cantonal banks are backed by unlimited state guarantees, with the exception of the Banque Cantonal Vaudoise, the Berner Kantonalbank and the Banque Cantonale de Genève, which are not guaranteed by their corresponding cantons.
The state guarantee insures the complete repayment of eligible customer deposits in the event of a bank failure. Eligible deposits include those held in pillar 3a, vested benefits, checking and savings accounts as well as medium term notes and fixed-term deposits.