The New Deposit Guarantee Schemes Directive

Level of deposit protection

Currently, depositors are covered up to €100 000 per authorised deposit. The new DGS Directive confirms that €100 000 is an appropriate level of protection and this will continue to be the case. So-called ‘temporary high balance’ deposits will enjoy higher coverage. This will apply to deposits relating to real estate transactions (e.g. the sale of a house) as well as those related to specific life events (such as marriage, divorce, retirement, etc.). However, such coverage will be limited in time (up to a maximum of 12 months, to be determined by each member state).

The limit of €100 000 applies to all aggregated accounts at the same bank. Should a bank operate under different brand names, the sum of all deposits by the same depositor at this bank is covered under one limit of €100 000. For this reason, depositors must be informed that deposits held under different brand names of the same bank are not covered separately. Deposits by the same depositor in different banks all benefit from separate protection. DGSs will protect all deposits held by individuals and enterprises whatever their size, but deposits of financial institutions and authorities will not be covered.

Another change is that for branches established in other Member States, repayment to depositors of those branches shall be made by the DGS of the host Member State under the instructions of the DGS of the home Member State. The latter shall also provide the necessary funding prior to payout.

Ex-ante financing

In many Member States the DGSs are only financed ex-post currently. The DGS Directive requires ex-ante financing. Credit institutions are required to make biannual contributions to their DGS. DGSs should reach a total amount of financing equal to at least 0.8% of the total covered deposits of their members by 3 July 2024. If the ex-ante financing of a DGS is insufficient to repay depositors in the case of a bank failure, additional contributions may be required from the member banks of the DGS, up to a maximum amount of 0.5% of the covered deposits.

DGS funds may also consist of so-called “payment commitments”. This means payment commitments of a bank towards a DGS which are fully collateralised providing that the collateral consists of low risk assets, and the collateral is unencumbered by third party rights. The total share of payment commitments shall not exceed 30% of the total amount of available financial means of the DGS.

In order to ensure consistent application of the DGS Directive in Member States, the European Banking Authority (EBA) will issue guidelines to specify methods for calculating the contributions to DGSs, which will include a calculation formula, specific indicators, risk classes for members, thresholds for risk weights assigned to specific risk classes, and other elements.

Access to the guaranteed amount will be faster

Under the current directive, depositors must be able to access their funds within 20 working days after a bank failure. The moment of ‘bank failure’ is the point in time at which deposits are unavailable, as determined by a judge or competent authority. The deadline for repayments will be gradually reduced from 20 to 7 working days with the 7 working day period applicable from 1 January 2024.

Information Sheet

In order to ensure that depositors are aware of the protection of their deposits, they are required to countersign a standardised information sheet. This sheet will contain all the relevant information about the coverage of their deposit by the responsible DGS. The relevant bank is required to circulate an updated standardised information sheet to their customers at least once a year. Banks will also have to include wording on their statements of account which informs their depositors about the DGS protection of their deposits.

Implementation in Germany

The DGS Directive will be implemented in German law probably in July 2015. However, Germany already has a deposit protection system in place which provides the level of protection stipulated in the DGS Directive.

Deposit protection in Germany is currently based on three pillars:

• Statutory deposit guarantee schemes
• The deposit guarantee schemes of associations of the German banking industry
• Voluntary deposit guarantee schemes for public and private sector banks

This three pillar structure of deposit protection schemes is a feature of the German banking system and may be maintained in the future (see below).

Statutory deposit guarantee schemes

Since 1998, all banks (with the exception of the "Sparkassen, Landesbanken, Landesbausparkassen" and "Genossenschaftsbanken" –see below) have been required by the Deposit Guarantee and Investor Compensation Act ("Einlagensicherungs- und Anlegerentschädigungsgesetz" – EAEG) to protect their deposits through membership of a statutory compensation scheme (although this does not apply to credit institutions which passport into Germany from other EU member states which operate under their home state scheme).

An institution’s authorisation to operate its business is conditional on membership in a statutory compensation scheme. For this purpose, the Compensation Scheme of German Banks GmbH ("Entschädigungseinrichtung deutscher Banken GmbH" (EdB)), of which all private banks are members, has been set up. This statutory deposit scheme guarantees the customer that his deposits are protected up to an amount of €100 000 per institution. The EdB does not provide cover for financial institutions and authorities. Moreover, cover is only guaranteed if the deposits were made in the Euro currency or another currency which is used in the European Union.

There is another statutory deposit scheme called the "Entschädigungseinrichtung des Bundesverbandes Öffentlichen Banken Deutschlands GmbH" (EdÖ), which provides cover for public-sector institutions. These two statutory deposit schemes will remain unchanged and become “official DGS” under the DGS Directive and will be covered by the directive provisions.

Deposit guarantee schemes of associations of the German banking industry

All public-sector savings banks ("Sparkassen"), state banks ("Landesbanken") and state building and loan associations ("Landesbausparkassen") as well as co-operative banks ("Genossenschaftsbanken") are members of their own institution protection schemes: "Deutscher Sparkassen- und Giroverband" (DSGV) and "Bundesverband der Deutschen Volks- und Raiffeisenbanken" (BVR). The cover required by these institution protection schemes exceeds €100 000.

As a result, banks which are members of an institution protection scheme are currently exempted from mandatory membership in a statutory compensation scheme. Once the DGS directive enters into force, BaFin may recognise these deposit guarantee schemes of associations of the German banking industry as “official DGSs” which are subject to the DGS Directive. They may also continue their activity as pure Member State Institutional Protection Schemes (IPS). However, an IPS would not be subject to the DGS Directive. As a consequence, its member banks would have to be members of an official DGS. Therefore, a bank would be a member of both, the official DGS and the IPS. There is no legal requirement for the IPS membership, so a bank may cease its IPS membership. However, since the IPS provides additional cover above €100 000, a bank might want to continue with membership of both.

Voluntary deposit guarantee schemes for public and private sector banks

In addition to the statutory deposit guarantee schemes, many institutions (private banks, private building and loan associations as well as public sector banks) have entered into voluntary arrangements for the protection of deposits and liabilities under securities transactions which seek to provide a level of protection for customer monies exceeding the minimum statutory scope.

The following voluntary deposit guarantee schemes exist:

• Private banks can additionally protect their customers’ monies through a deposit guarantee fund of the Association of German Banks ("Bundesverband deutscher Banken e.V." ((BdB)).
• For public sector banks, the voluntary Deposit Guarantee Fund of the Association of German Public Sector Banks ("Bundesverband Öffentlicher Banken Deutschlands e.V." (VÖB)) was established.
• The majority of the building and loan associations are members of the deposit guarantee fund ("Bausparkassen-Einlagensicherungsfonds e.V.").

All of the above would continue their activity as pure IPS. Again, its members would also have to become members of an official DGS.