What happens when a bank fails? The guarantee mechanism in practice
Definition
When a bank loses the ability to repay deposits (unavailability of deposits), the national deposit guarantee scheme is obliged to pay depositors the protected amount — up to the harmonised limit of EUR 100,000 per depositor per bank (Directive 2014/49/EU).
What it means in practice
Step 1 — declaring deposits unavailable. The guarantee procedure is triggered when the relevant supervisory authority determines that the bank is unable to repay deposits and has no prospect of quickly recovering that ability — or when a court issues an insolvency ruling. In Poland the supervisory authority is the KNF, and the guarantee scheme is the BFG.
Step 2 — payout deadline. The DGSD2 directive (Art. 8) shortened the payout deadline from 20 to 7 working days (in phases). In Poland the Act of 10 June 2016 on the BFG provides for payment of guaranteed funds within 7 working days of the day the guarantee condition is met (with the possibility of extension in the cases under Art. 36 of the Act). The euro equivalent in złoty is calculated at the NBP average rate of the day the guarantee condition is met.
Step 3 — scope of protected funds. The guarantee covers cash deposits (current, savings, term deposit accounts) up to the EUR 100,000 limit. It does not cover: — funds above the limit (these enter the insolvency/resolution estate as unsecured claims, with priority over shareholders but without a guarantee of full repayment); — financial instruments (shares, bonds, fund units); — funds in transit — a transfer that is in progress, rather than a booked deposit; — the bank's own funds.
Step 4 — resolution vs insolvency. Large, systemically important banks may be placed in a resolution process (compulsory restructuring) instead of standard insolvency — managed by the Single Resolution Mechanism (SRM) or a national resolution authority (in Poland, the BFG also acts as the resolution authority). In resolution the deposit guarantee still applies; deposits up to EUR 100,000 are protected. Above the limit, bail-in is possible (writing down or converting liabilities, including deposits above the limit, into capital) — this mechanism is described in Directive 2014/59/EU (BRRD). This means that funds above the harmonised limit may be subject to bail-in within resolution.
Step 5 — payout. The BFG (or the relevant national scheme) draws up a list of eligible depositors based on the bank's data and pays the funds directly or through a designated institution (e.g. another bank taking over servicing). The depositor does not have to initiate the procedure — the scheme contacts eligible parties on its own initiative or publishes information on how to collect the funds.
Why it matters
The guarantee mechanism works differently from the common notion of "instant protection". There is a procedure (declaring unavailability, a list of depositors, a payout deadline). Knowing this process lets you realistically assess what the guarantee actually provides — and what it does not.
Watch out
Historical banking crises — described in a separate article — show that guarantee processes can unfold differently when a crisis is systemic or cross-border. The DGSD2 and BRRD directives were adopted after the experiences of 2008–2013 precisely to standardise these procedures, but they do not eliminate all risks. Funds above the limit are not protected by the guarantee and are subject to the general rules of insolvency or resolution proceedings. For questions about a specific situation, consult an adviser or the BFG / relevant guarantee scheme directly.
This content is for information only — it is not financial, legal or tax advice. WTP Finance does not advise on how to allocate funds.