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When a bank is wound up....depositors are usually protected up to a certain amount.

Let's say this certain amount is 100K.

If a depositor had 150K in the bank, the 50K will be 'frozen' or even locked up. That very same bank though has provided lots of collateral loans (E.g property/land/house/etc) for other customers.

Is it possible to buy an asset/property that was a collateral through them and deduct those 50K from the value of the collateral?

As an example, a flat was the collateral for a loan. That flat is worth 100K. Could you then offer the bank 50K to be used together with your 'lost' 50K from your deposits/savings?

Does this happen in practice a lot?

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When the bank fails - its not the bank that you need to negotiate with, its the entity that took over its assets (including the outstanding loans). Usually, that would be the same entity that insured the deposits (FDIC in the US, governments or similar agencies in the EU countries).

This is basically a bankruptcy, and unless the regulator can find a buyer to take over the bank and assume all the responsibilities, the uninsured depositors become creditors and stand in line with all the rest of the bank creditors in the bankruptcy proceedings. Depending on the law, they may be preferred creditors (front of the line), but creditors nonetheless. The process of distributing assets (including the outstanding loans) will be managed through the bankruptcy proceedings, and based on the decisions of the supervising court, the depositors may get some, all, or none of their uninsured deposits.

This happened a lot in the US in 2008-2010 (bank failures, that is), but most, if not all, the failed banks ended up being acquired and their responsibilities assumed. To the best of my knowledge, the depositors (even the uninsured ones) were not harmed, but I may be wrong on that.

  • hmmm, not sure whether this answers my question fully. so most banks provide a gurantee on deposits up to a certain amount. The rest of the amount is frozen. I guess what I'm trying to find out is if you can help the bank (through the appointed administrator) to get some of its money back (e.g by acquiring one of the collaterals it had against a loan and the bank helping in turn by using part of your locked/uninsured deposit) – kkudi Mar 28 '13 at 20:46
  • @kkudi its not the banks that provide guarantees. You're confused because you think that the deposits are guaranteed by the banks, so you want to negotiate with them. That's not the case. The deposits are guaranteed by a third party (government, for the sake of the argument). Once the bank fails, that guarantor takes over the banks assets, and in return - pays the guaranteed amounts. What's above the guarantee - is technically lost, doesn't exist anymore. From now on it becomes a loan to the failed bank, and the depositor becomes a creditor. – littleadv Mar 28 '13 at 20:55
  • exactly, so the depositor becomes the person who is owed money. so...if the failed bank, through an appointed administrator/agency/government/whatever could get some of its money back...example by selling collateral assets against loans....can someone acquire that collateral by negotiating the 'loan' as creditors they are to offset against it? – kkudi Mar 28 '13 at 20:58
  • @kkudi theoretically yes. You go to the administrator of the bankruptcy and negotiate with them. You can acquire the loan, not the collateral, as the collateral doesn't belong to the bank. Practically, I doubt it is feasible for a small-scale depositor. If you had 1B of deposits, you'd probably be able to negotiate some deal, but with 50K - unlikely, you'll be treated as a member of a pool instead, and get a portion from a group settlement for all the depositors. – littleadv Mar 28 '13 at 21:00
  • ok thanks a lot :-). Is there a name to this procedure? – kkudi Mar 28 '13 at 21:00

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