I have copied this post from another thread as it explains it well. Brendan
You need to have a basic understanding of how banks are funded to understand the DGS and whether there is risk.
If a bank gets into trouble, there is an order in which things get wiped out and/or converted to ordinary shares.
1. Existing capital 'common equity' (share capital retained earnings)
2. AT1 bonds
3. Tier 2 bonds
4. Deposits in excess of DGS
5. Covered deposits
The regulators have set minimum CET1 (1+2) and CET2 (1+2+3) ratios for all the banks, based on the risk of their assets. The bigger the bank, the more the regulators are breathing down their necks.
If things start to go bad, AT1 bonds get 'bailed in' to become shares. Then the tier 2, etc, until the bank has enough capital again. There would have to be a catastrophic event, with the regulators back turned for a long time before a DGS would be invoked for a large bank. You're talking about a complete bank failure.
In the case of an Irish 'pillar' bank, in my opinion you're looking at an entire country economic collapse before covered deposits are at risk.
If the DGS does get invoked, each country has legislation around their scheme. Yes, the schemes only hold cash of c. 1% of covered deposits, but they can also do an 'asset grab' of the assets of the bank and use the funds to pay out. They can also borrow money from the markets, and impose levies on the remaining banks.
The DGS has been used 5 times in Ireland, for Credit Unions.
Personally, I sleep easy at night putting my money on deposit with AIB or BOI.
Life is too short to be worried about giving my money to a sub prime lender or car finance operation I've never heard of somewhere in Europe.
You need to have a basic understanding of how banks are funded to understand the DGS and whether there is risk.
If a bank gets into trouble, there is an order in which things get wiped out and/or converted to ordinary shares.
1. Existing capital 'common equity' (share capital retained earnings)
2. AT1 bonds
3. Tier 2 bonds
4. Deposits in excess of DGS
5. Covered deposits
The regulators have set minimum CET1 (1+2) and CET2 (1+2+3) ratios for all the banks, based on the risk of their assets. The bigger the bank, the more the regulators are breathing down their necks.
If things start to go bad, AT1 bonds get 'bailed in' to become shares. Then the tier 2, etc, until the bank has enough capital again. There would have to be a catastrophic event, with the regulators back turned for a long time before a DGS would be invoked for a large bank. You're talking about a complete bank failure.
In the case of an Irish 'pillar' bank, in my opinion you're looking at an entire country economic collapse before covered deposits are at risk.
If the DGS does get invoked, each country has legislation around their scheme. Yes, the schemes only hold cash of c. 1% of covered deposits, but they can also do an 'asset grab' of the assets of the bank and use the funds to pay out. They can also borrow money from the markets, and impose levies on the remaining banks.
The DGS has been used 5 times in Ireland, for Credit Unions.
Personally, I sleep easy at night putting my money on deposit with AIB or BOI.
Life is too short to be worried about giving my money to a sub prime lender or car finance operation I've never heard of somewhere in Europe.
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