The Directive adopts a maximum harmonisation approach, i.e. statutory deposit protection in the member states may not go beyond its provisions.

Difficult negotiations

The Directive is based on a compromise reached between the European Commission, the Council and the European Parliament at the end of 2013 following years of negotiations. The European Commission had submitted a proposal for the revised directive in mid-2010; however, this was rejected by the Council and the Parliament. The proposal was unacceptable from a German standpoint because it provided for a compensation limit of €100,000, among other things. This would have led to a prohibition of the voluntary deposit guarantee schemes and the institutional protection schemes in Germany, as these permit significantly higher cover.

The Commission also proposed a target funding level for the guarantee scheme of 1.5% of eligible deposits, to be accumulated within a period of eight years (uniform target fund level). The European guarantee schemes were also to be obliged to lend to each other.

Ex ante financing

The Directive on Deposit Guarantee Schemes is designed to improve depositor protection in Europe. The aim is for the institutions themselves to bear the risk of having to compensate depositors and to avoid the need for Government aid. In line with this, the Directive specifies that all deposit guarantee schemes must be financed ex ante. To date, these schemes have only been financed ex post in many EU countries. Under the ex post model, the deposit-taking credit institutions assigned to the guarantee schemes only have to pay contributions if a compensation event occurs. By contrast, the deposit-taking credit institution that causes the compensation event is not required to make any contributions at all because it has become insolvent.

All deposit guarantee schemes in a given member state must reach a minimum target level of 0.8% of their member institutions’ covered deposits within the next ten years. Up to 30% of the funds provided by the institutions may consist of irrevocable payment commitments. In addition, the guarantee schemes may levy a special annual contribution amounting to a maximum of 0.5% of covered deposits to finance a current compensation event if the funds already collected are insufficient for this. If the guarantee schemes require further funds, they must take out loans, which can be repaid over a longer period of time by collecting special annual contributions.

Guidelines on collecting contributions

The European Banking Authority (EBA) is currently developing two sets of guidelines based on the Directive that set out the details of how contributions will be collected. One set of guidelines will specify the methods to be used to calculate the risk-based contributions to deposit guarantee schemes. The other set of guidelines will establish uniform pan-European requirements for the payment commitments that institutions can use instead of cash contributions to achieve their target funding.

Under the planned guidelines on risk-based contributions, deposit-taking credit institutions that have a higher risk of a compensation event occurring due to their business model, or that would have a particularly negative impact on the deposit guarantee schemes should such an event occur, must pay a higher contribution in future. Since Germany’s deposit guarantee institutions are ex ante funded, they are pioneers in this area – most already use extremely detailed risk-weighted contribution methods. However, it is not yet clear whether these methods will be compatible with those to be set out by the EBA in the guidelines.

Institutions that wish to take advantage of the option to provide 30% of their contributions to deposit guarantee schemes in the form of payment commitments must enter into a payment commitment agreement. The form of these agreements will be governed by the guidelines on payment commitments. According to these guidelines, for a credit institution’s payment commitments to be approved, the securities must be fully collateralised in favour of the deposit guarantee scheme concerned; in addition, the collateral must comprise low-risk debt securities, it must be available to the deposit guarantee scheme at any time, and it may not be encumbered with third-party rights.

If a credit institution does not meet its obligation to pay cash contributions when they fall due, an enforcement event occurs. The deposit guarantee scheme may then realise the debt securities. Haircuts are envisaged to ensure that the collateral generates sufficient income when it is realised.

New rules for credit institutions and compensation procedures

Under the Directive on Deposit Guarantee Schemes, all credit institutions must be allocated to a statutory or legally recognised guarantee scheme in future. In the past, credit institutions were exempted from allocation to a statutory compensation scheme if they belonged to an institutional protection scheme.

The Directive also sets out the compensation procedure in much more detail than before. It expands depositor protection, places all guarantee schemes under supervision and specifies the conditions under which credit institutions may be supported by the guarantee schemes.

The member states must reduce the payment deadline for depositor compensation – currently 20 days – to seven days from the determination of the compensation event by 31 December 2023 at the latest.

In future, all depositors – including larger companies – will have a legal right to compensation of up to €100,000 for their covered deposits. To date, customers of institutional protection schemes have not had such a legal right: savings banks, Landesbanks, regional building societies and cooperative banks are not currently allocated to any statutory compensation schemes since they are members of separate guarantee schemes (institutional protection schemes). Institutional protection schemes protect an institution against insolvency since it is supported by the other scheme members when it first runs into financial trouble. This indirectly protects client money.

In future, depositors will also have a legal right to compensation for deposits of over €100,000 made in connection with specific life events – such as the sale of private real estate, marriage, or a severance payment – for at least three months after the date of deposit.

Compensation procedures for branches of institutions that operate in other states belonging to the European Economic Area in accordance with section 53b of the German Banking Act (Kreditwesengesetz – KWG) will be assumed by a compensation scheme in the host country in future. This means that affected parties no longer have to contact the guarantee scheme in the institution’s home country directly. However, the compensation scheme in the home country must provide in advance the funds needed to pay the compensation to the compensation scheme in the host country.

New powers for statutory deposit guarantee schemes

The statutory deposit guarantee schemes are also being granted new powers. The EU member states may permit these schemes to use their funds not only for compensation payments to depositors but also for measures that could prevent a credit institution from defaulting.

In addition, the member states may allow their guarantee schemes to grant loans to other deposit guarantee schemes in the EU if the latter do not have sufficient funds for a compensation event.

Link to the Bank Recovery and Resolution Directive

The content of the Directive on Deposit Guarantee Schemes is linked to that of the Bank Recovery and Resolution Directive. The deposit guarantee schemes will contribute to resolution costs where resolution tools are used since transferring protected deposits to a bridge bank or other recovery measures prevent a compensation event from being determined. The contribution made by the deposit guarantee scheme should not exceed the compensation it would have had to pay if the affected institution had not been supported by the resolution regime under the Bank Recovery and Resolution Directive. The details are defined by the member states during their transposition of the Directive into national law.

Under the Bank Recovery and Resolution Directive, the guarantee schemes that assume the rights and obligations of depositors with covered deposits in the event of the credit institution becoming insolvent are granted a preferential claim in the insolvency proceedings. This increases depositors’ insolvency dividends.

Transposition into German law

The Directive on Deposit Guarantee Schemes is expected to be transposed into German law in July 2015. It will have a lasting impact on the deposit guarantee schemes and introduce stricter supervisory requirements.

The German Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz – EAEG) as well as all contribution regulations specifying the requirements of the EAEG in greater detail must be adapted to the new rules or rewritten. The Directive on Deposit Guarantee Schemes is expected to be implemented in the form of a Deposit Guarantee Act and an Investor Compensation Act. The extensive changes introduced by the deposit guarantee reform mean that it will no longer make sense to have a common act for both investor compensation and deposit protection in the future.

German deposit guarantee structure to remain in place

Nevertheless, the historical structure of deposit protection in Germany will be retained in future. It is unique in Europe and comprises three pillars: the two statutory compensation schemes (Entschädigungseinrichtung deutscher Banken GmbH - EdB, and Entschädigungseinrichtung des Bundesverbandes Öffentlicher Banken Deutschlands GmbH - EdÖ), the institutional protection schemes operated by the German Savings Banks Association (DSGV) and the National Association of German Cooperative Banks (Bundesverband der Deutschen Volks- und Raiffeisenbanken - BVR), and the voluntary Deposit Protection Fund in force at private commercial banks and public-sector banks.

According to the Directive, all deposit-taking credit institutions must now be allocated to a statutory or official deposit guarantee scheme that is recognised in the member state concerned. Recognition is granted by the national supervisory authorities, i.e. BaFin in Germany. BaFin will also comprehensively supervise the recognised guarantee schemes.

The statutory deposit guarantee schemes – the EdB and the EdÖ – will remain in place. The institutional protection schemes operated by the DSGV and the BVR will be eligible for recognition if they meet all of the requirements. This includes granting a legal claim to compensation and accumulating the target funding.

In addition, deposit-taking credit institutions may continue to belong to the Deposit Protection Fund operated by the Association of German Banks (Bundesverband Deutscher Banken e.V.) or the scheme operated by the Association of German Public Sector Banks (Bundesverband Öffentlicher Banken Deutschlands e.V.) on a voluntary basis. However, these schemes must now explicitly indicate, in a clearly visible form, that they are not obliged to pay compensation.