My bank stopped. How do I reclaim my deposit?

Legal Floris LLC

There can be different reasons for banks and other financial institutions to stop their operations. Bank failure is the most common reason for banks to stop. Creditors, and in particular account holders, are subject to a wide variety of international rules and local safeguards to protect their position and reclaim their money. Although sovereign states and jurisdictions issue their own framework for failing banks, a standard level of harmonization applies to provide bank customers all around the world with a comforting level of protection.

The most common cause for bank failure and the closure of financial institutions include, but are not limited to financial challenges that lead to liquidity shortages and possible default towards account holders and other creditors, as well as regulatory violations. Sanctions against the bank or financial institution aim to protect the public interest. This means that tax payer input should be avoided, and losses of the bank come at the expense of the creditors. To mitigate these risks, depositor protection allows for a swift resolution of an insured amount. Creditors with account balances that exceed the insured amount are subject to local bankruptcy, insolvency and company laws.

On a macro-economic level, global banking and finance is interconnected and has a contagious effect. From a top down perspective local banks and financial institutions are, due to their funding mechanisms and size, sensitive for value depreciation. Regulators and supervisory authorities therefore closely monitor the position of the financial institutions that operate within their jurisdiction. When rescue missions cannot deliver stability to the financial system, bank closure seems often justified.

Bank failure comes for most creditors often as a total surprise. To avoid panic and maintain its position while restructuring or capital enhancement strategies are adapted, financial institutions do not make their challenges public. The media often discloses such challenges, and several creditors act to protect their assets. The result is a downward spiral that accelerates the challenges the bank experiences.

The answer to the question how creditors can reclaim their money after their bank stopped depends on the corporate structure and location of the respective financial institutions and its licensing agreement. However, in general, one can follow the standard international rules for deposit protection and insolvency law. Meanwhile, the first moments of the bank closure and special administration are critical to create and maintain a priority position for repayment.

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