As for any company a bank fails when it defaults on its payments. In other words, a bank failure occurs when the bank is no longer able to pay its debts by the due date or repay its creditors. at which time the bank must be closed and liquidated.
When depositors entrust their money to their bank, they become the bank's creditors and the bank is indebted to them since it must return their funds to them.
If a bank were to fail, its customers would lose access to their accounts and their payment facilities (cheque books, cards). They would be ordinary creditors of a closed and liquidated bank. They would be treated like the other ordinary creditors, and compensated at the end of the liquidation with the funds recovered by the liquidator. Such a situation would very prejudicial to the bank's customers and, more generally, to the economy as a whole. This is simply unacceptable in a modern society where banks play such a major role.
DEPOSIT GUARANTEE SCHEME: PROTECTION AGAINST A BANK FAILING
That is why deposit guarantee schemes have been in place in all European countries and around the world for many years. In France, this scheme is managed by the FGDR. If there were a possibility that a troubled bank might fail, and before the failure occurred, the banking authorities (Autorité de Contrôle Prudentiel et de Résolution) would ask the FGDR to intervene on behalf of the customers.
That is also why, in order to minimise the risk of a failure, banks are subject to strict rules regarding capital and own funds, risk-taking and liquidity management. Compliance with these rules is closely and continuously monitored by the supervisory authorities (Autorité de Contrôle Prudentiel et de Résolution, European Central Bank, European Banking Authority). They have become much more stringent since 2008.
BANKING ACTIVITY IN FRANCE
In France, there has not been a bank failure, in the true sense of the term, for more than 20 years and, unlike many other European countries, none occurred during the most recent financial crisis. On the one hand, the full-service bank business model proved to be robust; on the other hand, troubled banks were dealt with early on, depending on the seriousness of their situation, so that the necessary measures (recapitalisation, restructuring, sale of subsidiaries or activities, closing of loss-making segments, etc.) could be approved and implemented long before a risk of suspension of payments arose. As a result, for more than 20 years, even though a number of institutions have been restructured and even broken up, business continuity has always been ensured for customers, and particularly for depositors who have never lost access to their accounts or use of their payment facilities.
The FGDR can also play a role when a troubled bank is restructured, prior to a suspension of payments, such as by providing leadership and financing, either on a preventative basis or through a "resolution" intervention.
By protecting customers, it helps to maintain confidence in and ensure the stability of the banking system.