Deposit Guarantee Fund: What it is and how it works

At a glance:

  •  The Deposit Guarantee Fund protects your bank deposits up to a certain amount.

  •  Understanding how the Deposit Guarantee Fund works is essential before making any decisions.

  •  At Carregosa NextGen, we explain why this guarantee is important when choosing where to invest your money.

When you deposit money in a bank, a natural question arises: is your money really safe?

The answer lies in an important mechanism within the financial system: the Deposit Guarantee Fund. This fund exists specifically to protect depositors if something goes wrong with a banking institution.

If you are starting to invest, save or exploring solutions, understanding how this protection works is essential. In this article, we explain what the deposit guarantee fund is, what benefits it offers and what its limits are, so you can make more informed financial decisions.

Deposit Guarantee Fund: What is it?

The Deposit Guarantee Fund (DGF) is a protection mechanism designed to reimburse depositors if a bank is unable to return the money entrusted to it. This fund is financed by the banking institutions themselves and supervised by the financial authorities, with the aim of protecting customers and strengthening confidence in the banking system.

In practice, if a bank fails to meet its obligations, the DGF can reimburse deposits up to a limit of €100,000 per depositor and per banking institution. This limit applies to the total deposits that each person holds with that bank, regardless of the number of accounts (current, term or savings).

When an account has more than one holder, the protection is calculated per person and not per account. In other words, the account balance is divided between the holders for guarantee purposes. For example, in a joint account with two holders and a balance of €200,000, it is normally assumed that each holder owns half (€100,000). In this case, each one is fully protected by the Deposit Guarantee Fund. If the balance is higher, each holder remains protected up to the maximum limit of €100,000.

Advantages of the Deposit Guarantee Fund

The Deposit Guarantee Fund offers several advantages to those who deposit money in a bank. Here are the main ones:

Security for depositors

The biggest advantage is clear: protection of the deposited capital. Even in an extreme scenario where a banking institution becomes insolvent, the Deposit Guarantee Fund ensures reimbursement up to the defined limit. This means that your money is not entirely exposed to the risk of the financial institution.

Confidence in the financial system

The Deposit Guarantee Fund also helps to maintain the stability of the banking system. Without this mechanism, many depositors might withdraw their money at the first sign of instability. The existence of a guarantee reduces this risk and increases confidence in banks.

Automatic protection

You don't need to do anything to benefit from this protection. Whenever you open a deposit with a bank that participates in the DGF, the cover applies automatically, with no additional costs for the customer.

Limitations of the Deposit Guarantee Fund

Although it is an important protection, the Deposit Guarantee Fund does not cover everything nor in all situations. Here are its main limitations:

Maximum coverage limit

There is a maximum reimbursement limit per depositor. In most European Union countries, including Portugal, this limit is €100,000.

This means that if you have €20,000 deposited, the value is fully protected. But if you have €120,000, only €100,000 is covered.

Exceptionally, there are certain deposits, known as "Temporarily high deposits”, which benefit from additional protection for a limited period (at least three months) when they result from specific events in the depositor's life, such as:

  •  Real estate transactions: Money from the sale of your own residential property;

  •  Life events: Amounts related to marriages, divorces, retirements, redundancies, disability or death;

  •  Compensation: Insurance or compensation payments for criminal acts or wrongful convictions;

  •  Inheritances or similar payments.

Coverage per bank, not per account

Another important point to bear in mind is that the coverage of the Deposit Guarantee Fund applies per bank and not per account. This means that, if you have several accounts with the same institution, all balances are added together to calculate the total protected amount.

In practice, if you have money distributed across different products in the same bank, such as a current account, a term deposit or a structured deposit classified as a deposit, the Deposit Guarantee Fund considers the total accumulated value in that institution. If this amount does not exceed €100,000, it will be fully covered; if it is higher, generally only that limit is guaranteed.

It is also important to remember that this limit is applied separately to each bank. So, if you have deposits with different institutions, each one can benefit from its own protection limit.

Not all financial products are included

The Deposit Guarantee Fund protects traditional bank deposits, but does not cover all types of investment. Products such as shares, investment funds and ETFs are not covered by this guarantee.

When can the Deposit Guarantee Fund be activated?

The Deposit Guarantee Fund (DGF) is activated when a bank is unable to return its customers' deposits and the situation is formally recognised by the authorities. In Portugal, this happens when the Bank of Portugal determines that a credit institution is unable to repay depositors and it is not expected that it will be able to do so in the short term, or when a court decides on the liquidation of the bank. In these cases, the fund comes into action.

Although the DGF is an essential pillar of stability, its direct activation for the reimbursement of deposits is a rare event.

  •  The BPP case: Historically, the most direct example of the DGF being used in Portugal for the reimbursement of depositors occurred with Banco Privado Português (you can consult the history of reimbursement operations here);

  •  Preventive and confidence-building role: In other banking crises, such as that of Banco Espírito Santo (2014) or Banco Português de Negócios, the role of the Fund was mainly to guarantee confidence in the system and avoid a run on the banks, in accordance with the stability guidelines of the Bank of Portugal;

  •  Resolution mechanisms: In these cases, resolution measures or integration into other institutions were often applied, which allowed deposits to be secured without the DGF having to make direct reimbursement payments.

In practice, the existence of the Fund acts as a safety net that protects your assets up to the planned limit, ensuring that the financial system remains solid and resilient in the face of unforeseen events.

Deposits covered by the Deposit Guarantee Fund

In general, the Deposit Guarantee Fund covers traditional bank deposits, i.e. amounts that customers keep with a financial institution in the form of a deposit. However, the type of account or product can influence how this protection applies.

Demand deposits

Demand deposits are the bank accounts used for day-to-day money management. They are the accounts where you receive your salary, make payments, transfers or withdrawals.

All the available balance in these accounts is included in the calculation of the Deposit Guarantee Fund cover. This means that the money you keep in a demand deposit account is protected up to the guaranteed limit per depositor and per bank, together with any other deposits you may have with the same institution.

Term deposits

Term deposits are savings products in which you place money in the bank for a set period, usually in exchange for a defined interest rate.

As with demand deposits, the capital applied in a term deposit is also covered by the Deposit Guarantee Fund. In the event that the institution is unable to meet its obligations, the deposited amount is considered for reimbursement purposes within the protection limit provided.

Structured deposits

Structured deposits are products that combine a traditional deposit with a return mechanism linked to the evolution of certain assets or financial indicators.

When these products are legally classified as bank deposits, they may also benefit from Deposit Guarantee Fund protection, at least with regard to the deposited capital. However, it is always important to confirm this information in the product documentation, as conditions may vary.

Deposit Guarantee Fund: Invest safely with Carregosa NextGen

Understanding how the Deposit Guarantee Fund works is an important step towards building a savings and investment strategy. This protection helps ensure that, even in unlikely scenarios, depositors have a safety net for a significant part of their savings.

At Carregosa NextGen, you can find different savings and investment solutions, including various deposits that benefit from this protection. If you want to start exploring new financial opportunities, contact us and take the next step on your investment journey.

Deposit Guarantee Fund: Frequently Asked Questions

Below, we answer some of the most common questions about the Deposit Guarantee Fund.

What is the amount guaranteed by the Deposit Guarantee Fund?

The Deposit Guarantee Fund generally guarantees up to €100,000 per depositor and per bank. If you have a higher amount deposited, only that limit is protected, except in rare cases.

How long does it take for the Deposit Guarantee Fund to reimburse if a bank fails?

When a bank is no longer able to meet its obligations, the reimbursement process must occur within a relatively short period defined by European legislation, usually up to a maximum of 7 working days after the mechanism is activated.

Are there any structured products that have "Deposit” in their name? Are these also protected by the Deposit Guarantee Fund?

The so-called Structured Deposits are protected by the Deposit Guarantee Fund, as they are legally classified as bank deposits. This means that they are also covered up to €100,000 per depositor and per bank.