Deposits with banks are so popular because they are particularly secure due to legal protection. An average investment amount is fully protected by the deposit insurance. But what if shares are in a portfolio and the depository institution becomes insolvent? Does this mean the securities are also at risk?
The deposit holder remains the owner of the securities
Legally speaking, the answer is a clear no! Even if the depositary bank holds the shares in custody, the deposit holder always remains the owner of his/her securities. Depending on the type of custody, the depositary institution is either the owner, co-owner or trustee. The owner therefore has a claim to surrender under the law of obligations. This claim applies regardless of insolvency. In the case of insolvency, the securities in the custody account therefore do not belong to the insolvency estate. This also applies to claims for dividends or interest on securities held in custody. Depositors are not insolvency creditors and therefore are not considered in insolvency proceedings. For this reason, the share deposit account can still be accessed. A transfer of the securities to a deposit account at another bank is easily possible.
Legal protection for deposit holders
But what happens if the depository bank does not act appropriately? It is possible, for example, that orders are only executed in pretence and the investor money is used for other purposes. Or securities from deposits are loaned out unlawfully. If the institution becomes insolvent, the securities account holder may not be able to inist on his/her legal rights, because the securities may not be available (anymore). In this case, the Deposit Guarantee and Investor Compensation Act applies. It provides legal investor protection for depositors. While bank deposits are protected up to an amount of 100,000 euros, securities held in portfolios are entitled to a compensation of 90 percent of the amount owed, up to a maximum of 20,000 euros. In case of security trading companies and other financial service providers, the Compensation Institution of Securities Trading Enterprises (EdW) is responsible for this task. Private banks and public law deposit credit institutions have their own compensation schemes.
The possibility of voluntary protection
In the case of depositary institutions, additional protection is possible. These depositary institutions have to be directly or indirectly linked to a voluntary deposit guarantee scheme of private or cooperative banks or savings banks. However, there is no legal claim in this case. In fact, there have never been any insolvency-related financial losses for custody account holders in regard to these institutions. The most spectacular case of investor damage was the insolvency of Phoenix Kapitaldienst GmbH in 2005. This security tradings bank ran a pyramid scheme with fictitious option transactions, which finally collapsed. The EdW paid around EUR 261 million to the about 30,000 investors. However, this could only cover around 30% of the damage. All further cases that have occurred so far are negligible.
Broker comparison: conditions for small investors of greater importance
Despite this case: overall, stock portfolios are secure. When choosing a custodian bank, the conditions rather than the security aspect should be considered. With our broker comparison calculator you can easily find the most suitable broker for you.