When the money doesn't come, depositors get nervous: "I have little confidence in the deposit protection fund and serious doubts whether I will be compensated in a timely manner," wrote the user "Buschwerker" at the end of March 2021, about two weeks after the insolvency of Greensill Bank, underneath an article by Stiftung Warentest about the bankruptcy. "No payment received by March 31st!" exclaimed "Casacorinna", and "Orteni" noted that the statutory compensation deadline of seven working days was "obviously not guaranteed."

Unlike a handful of private individuals on the internet, the Association of German Banks gives a positive assessment. "In our view, the compensation of depositors proceeded optimally," says Hilmar Zettler, a member of the management board responsible for banking supervision and deposit protection. Compensation institutions of German banks and the associated deposit protection fund paid out €3.0 billion to around 22,000 deposits back then. Depositors received the legally mandated compensation of up to €100,000, but also the additional protection from the security fund for amounts beyond that, often safeguarding multimillion amounts of institutional banking customers.

The International Association of Deposit Insurers (IADI), the global association of deposit protection systems, gives a positive review after the Greensill bankruptcy. On March 25, 2021, seven working days after the insolvency, 82% of depositors responded to the original letters sent by the institutions. By then, 99.5% of them had already been compensated. By the end of July, more than 99% of depositors had been paid. This is stated in a recently published report by IADI.

Rapid payouts are often a challenge for deposit protection systems, as documented in the report. Several institutions intervened after bank failures, including 19 surveyed security systems in the years from 2016 to 2021. Many security systems only partially meet the seven-day payout deadline, which is a guideline in IADI statutes.

The reasons are diverse: In several bankruptcy cases, it was difficult for security systems to contact affected customers or determine their specific claims. The pandemic and fraud cases sometimes complicated payouts. More often than not, there was a lack of an account to transfer the money to, or customer identification failed. According to the IADI, the most common problem, however, is the lack of reliable and consistent customer data. The organization recommends standardized customer information, which can then be readily available in case of bankruptcy.

Especially in emerging countries, as the IADI report suggests, compensation is complex. For example, the state deposit protection in Mexico, the Instituto para la Protección al Ahorro Bancario (IPAB), had to compensate approximately 643,000 people after the country revoked the license of Ahorro Famsa Bank.

The problem was, that many people didn't even have another account. The deposit protection paid smaller amounts by sending customers a code via text messaging, allowing them to withdraw money from ATMs even without a customer card. Customers with larger amounts received a check. Additionally, the deposit protection collaborated with a partner bank to enable transfers.

To assist the multitude of customers, the deposit protection sent staff to around 1,100 branches of the failed bank. They also informed about compensation on radio and television and utilized the call center of the bankrupt bank. Despite these efforts, after one month, only 72% of the insured deposits had been paid out, based on information by the IADI. Overall, it took much longer than in the German Greensill case.

There was another problem: About 2,500 depositors had deposited more money than was insured. The Mexican deposit protection only paid amounts up to approximately 2.57 million pesos, which is around €130,000 at today's prices. Savers took to the streets in Mexico City.

In the European Union, statutory deposit protection covers €100,000, and private banks in Germany voluntarily secure up to €5 million for individuals and up to €50 million for many other depositors. Savings banks and cooperative banks vouch for each other with their institutional security systems, thus avoiding a compensation case.

If too much time passes until compensation is paid, it becomes a problem for the entire industry: Banks' deposit business relies on customer trust. Swift compensation aims to prevent customer flight before it occurs. A worldwide survey among bank customers revealed that deposit insurance deters many, but not all people from withdrawing their money rapidly in the event of a crisis. Thus, the industry must fight to maintain customer confidence.

"Good preparation is essential," says banking association expert Zettler regarding the Greensill case. The compensation institution and the deposit protection fund prepared early. Even before BaFin imposed the moratorium, Greensill Bank provided all necessary customer data. There is a standard format for this. Identifying customers was therefore straightforward.

However, the role of interest platforms was challenging. Within a short period, Greensill Bank raised customer money via portals like Weltsparen and expanded its balance sheet to €4.5 billion at its peak. Hence, the private banks' deposit protection prepared nine different letters to accommodate all customers. They also engaged in discussions with interest platforms. Savers were affected with a few thousand or tens of thousands of euros, but there were also institutional investors with higher amounts.

But the Greensill bankruptcy also sparked disputes. Hypo Real Estate Holding, which emerged from the failed bank of the same name, still demands €75 million. The association argues that a holding is a bank and thus excluded from deposit protection. The institutions have been arguing over this matter in court since then.

Today, IADI lists 114 security systems worldwide. Nevertheless, while deposit protection is indispensable, it can also cause problems. Bank customers can lose their sense of risk and focus solely on interest rates. The phenomenon known in economics as "moral hazard" is not only discussed in professional circles but is also evident to internet users: "If a bank offers an interest rate far above the usual conditions, where it is obvious to every layman that the bank is subsidizing, why don't I question that?" writes "Wodan37" about Greensill. "And then be surprised and blame others."

Indeed, failed banks often took on high risks. Greensill Bank provided the necessary liquidity within the Greensill Group, but the insolvency of the parent company also pushed the bank to the brink. The German branch of Maple Bank engaged in extensive Cum-ex transactions before having to cease operations due to a tax refund request. In the US, Silicon Valley Bank, which invested in long-term bonds, couldn't handle the interest rate shift, and the state had to step in.

IADI also seems to have identified a misalignment in Germany: Many compensated interest savers immediately reinvested the money through an interest platform again after the bankruptcy. They didn't shy away from the risk. It was also observed that some depositors withdrew their money only up to the insurance limit before the bankruptcy. "Moral hazard" is the IADI's diagnosis.

Of course, this behavior can also be interpreted as a sign of trust. In the comments section of Stiftung Warentest, the resentment quickly dissipated: "Casacorinna" admitted to having provided a different account number in the compensation form. The compensation institution subsequently requested a copy of her ID card, but promised the payment. "Buschwerker" added that he had received the payment, albeit with a delay. The uprising didn't happen. Operation succeeded.