One of the first stages in the resolution processes of a bank failure is according to the Bank Recovery and Resolution Directive (BRRD) swift access to insured deposits. The public opinion assumes that every deposit is insured. Recent bank failures throughout Europe revealed that resolution authorities who are responsible for the payout of deposits via their respective depositor protection scheme often need to investigate if a claim filed under a deposit guarantee scheme (DGS) should be excluded from insured payments.
National directives follow European guidelines and exclude specific business activities or industries from insurance coverage. In general, credit, payment and electronic money institutions, investment firms and investment management companies are excluded from DGS compensation. Financial holding companies (FHC) either engage in banking services themselves or hold shares of financial institutions. Legal persons that engage in financial activities can choose to become a financial holding company. Financial holding companies are also excluded from DGS coverage. As a matter of course, deposits arising from illegal activities or that have a connection with money laundering can be excluded from DGS compensation as well.
Recent developments in Latvia and Cyprus address specific challenges with shell companies. Shell companies are defined as companies without any genuine economic activities and lack of administrative requirements in the country of registration. The terms ‘substance’ and ‘presence’ are amplified and in prolongation of the efforts to avoid doing business with such a legal person, resolution authorities will be forced to determine whether shell companies qualify as financial institutions in the broadest sense of the word.
Resolution authorities are responsible for the approval of payments under their domestic deposit protection scheme. They use public sources, information provided by the failing bank, as well as the input from customers to determine if one qualifies for DGS payments. In the matter of shell companies, the mandatory business profile that is provided to the bank could be updated by submitting sufficient evidence of transactions. Clarity helps the resolution authority to pay out qualifying depositors and reject those who are not eligible. It is, therefore, mission-critical for customers to assure themselves that the business profile with the bank leaves no clues and that the transactions on the account show a logical pattern with the business profile.