European Commission Deposit Guarantee Schemes – Overview and Summary of Requirements
In 1994, the European Commission issued a Directive on Deposit Guarantee Schemes aimed at protecting bank account holders in case their banks failed. The Directive, which has been amended since its original implementation, would act as a safety net for depositors. If a bank closed down, the national Deposit Guarantee Scheme of each EU member nation would reimburse them up to a certain coverage level.
2010 Amendments to the Directive
Increasing levels of coverage
The financial crisis that swept across the EU in 2008 forced the commission to amend the original directive as it became clear that bank runs were a very real risk in case of bank failures. These amendments increase the coverage from a minimum of € 20,000 to € 100,000 by the end of 2010.
Harmonization
In the original, 1994, Directive, harmonization across the EU member states was not given much priority. The requirements were minimal, so individual states adopted varying levels of coverage under their national Deposit Guarantee Schemes. The financing of these schemes were also handled by member states individually. As a result, this led EU-wide financial instability among banks and other credit institutions.
This was seen at the peak of the financial crisis – British bank account holders shifted their money to those of Irish banks in the UK, leading to an abrupt, highly damaging fall in the liquidity of British banks.
This led to the newer amendments of the Directive tackling the issue of harmonization, confirming the required level of deposit protection. Harmonization across the EU will also lead to quick reimbursements to account holders and ensure proper funding of schemes.
Applicability
- The Commission’s Deposit Guarantee Schemes protect all deposits held by individuals, small, medium and large businesses.
- The Deposit Guarantee Schemes cover deposits in non-EU currencies.
- Complex products similar to bonds are not covered by the Deposit Guarantee Schemes
- Structured products whose principal is not repayable in full are not covered by the Schemes. This includes products whose values is dependent on a share price index.
- Deposits of financial institutions – professional players in the market – and public authorities are not covered by the Schemes
- Under the Schemes, deposits are covered per depositor per bank. If an individual has various accounts in one bank, then the € 100,000 limit applies to all these accounts in that single bank.
Summary of Directive Provisions
- Scheme membership: Every credit institution (in principle) is required to join a deposit guarantee scheme.
- Official National Schemes: EU Member states have to ensure that at least one deposit guarantee scheme is officially introduced and recognized.
- Exemptions, alternate guarantees: An EU member state may exempt a credit institution from a deposit guarantee scheme if it belongs to a system that protects the credit institution, ensuring its liquidity and solvency. This will guarantee protection for depositors at least equal to that provided for by a guarantee scheme.
- Sanctions for non-compliance: If a credit institution fails to comply with coverage requirements of a deposit guarantee scheme, sanctions will include the withdrawal of authorization.
- After authorization withdrawal: Deposits held by a credit institution, following the withdrawal of authorization, will continue to be covered by the deposit guarantee scheme.
- Host state scheme applicability: Depositors at branches in a host state will be covered by the scheme of the home state. If, for example, a French citizen has a deposit in a German bank that fails, then he or she is covered by the French national Deposit Guarantee Schemes.
- Providing information: Credit institutions have to give actual and intending depositors information about the deposit guarantee scheme that they are members of within the European Community.
- Topping-up Clause: Rules on voluntarily joining host-state deposit guarantee schemes by branches, if the level and/or scope of cover provided exceeds that provided by their home state scheme.
- Outside EU considerations: In circumstances where the head office of a credit institution is outside the EU, branches must have cover and information equivalent to that detailed in the Directive. If these branches don’t have coverage, they may be required by host states to join their national deposit guarantee schemes.
- Unavailable deposits: In the event of deposits being unavailable, the aggregate deposits of each depositor must normally be covered up to a certain amount.
- Exclusions, level increases: Member states may exclude or grant a lower level of guarantee to certain deposits/depositors. In specific circumstances (e.g. social considerations) higher/more comprehensive cover is permitted.
- Single depositor coverage: The individual who enjoys absolute entitlement to the funds held in the account is normally the individual covered by the guarantee.
- Multiple account holders: If absolute entitlement is vested in several individuals, account will be taken of the share of each. This is inapplicable to collective investment undertakings.
- Claims settlement: Within three months of the establishment by a competent authority that deposits are unavailable, verified claims must be satisfied. In wholly exceptional circumstances and in special cases a guarantee scheme may apply to the competent authorities for an extension of the time limit. No such extension shall exceed three months.
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