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You mentioned the BNP Paribas maybe being vulnerable to problems at CS. I have an account with BNP, not much in it, but I keep it open as I have a small loan with them. Do you know what happens when a bank collapses? I know they can bail in our deposits over and above a certain amount but what happens if we still owe them money or have an overdraught?

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Mar 16, 2023·edited Mar 16, 2023Author

EU deposits are guaranteed by State governments up to 100,000 euros

https://www.eba.europa.eu/regulation-and-policy/recovery-and-resolution/deposit-guarantee-schemes-data

When banks "collapse" it is a question of "how far". There is a "pecking order".

It is all about who gets paid first in a tiered system of priority over the "carcass" of the bank

Something like:

Holder of Bonds issued by banks - secured then unsecured

Holders of regulatory capital bonds - called Tier 1 then Tier 2

Hybrid bonds between regulatory capital bonds and Preference Shares.

then Preference Share Holders

then shareholders get a share of whatever is left

Lots of variations on these instruments - you have convertibles to throw in the mix too.

Each bank has its won structure with some variation on these themes.

Side note on derivatives markets - imagine the Kentucky Derby. The winner gets a prize of say, a million bucks, the punters in the crowd and on TV place bets of 100's of millions of dollars. They have no interest in the horses or the jockey or the race track.

Same goes for derivatives. There is an underlying "asset" - horses, jockeys, track etc - and then the betting whose value is "derived" from the asset.

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Thanks Peter. This is very useful. But what happens to people who OWE money to the bank when it "collapses"? If a bank can confiscate our deposits on which for a long time we've been receiving negligible and even negative returns, surely we can confiscate our overdraught, outstanding revolving credits and the like for which we pay double figure interest?

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You would think so, right? But no, your overdraft or mortgage or loan is an asset that is sold to someone else - who may or may not impose better or worse terms,

A bit like a power company going broke and your electicity bill being passed to a new supplier.

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