Explanatory Memorandum to COM(2008)661 - Amendment of Directive 94/19/EC on Deposit Guarantee Schemes as regards the coverage level and the payout delay - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2008)661 - Amendment of Directive 94/19/EC on Deposit Guarantee Schemes as regards the coverage level and the payout delay. |
|---|---|
| source | COM(2008)661  |
| date | 15-10-2008 |
In times of volatile markets, one of the biggest concerns for depositors is the safety of bank deposits should their bank fail.
Since 1994, Community rules have ensured that all Member States have in place a safety net for depositors if banks fail. A review of these existing rules published by the Commission in 2006 i highlighted a number of areas where improvements could be made. However, this report concluded that at that stage many of the improvements could be achieved without amending the legislation.
Events in 2007 and in 2008, and in particular the current turmoil on the financial markets, have exposed these deficiencies and their consequences in terms of depositors' confidence to a new extent.
Crucially, there is also increasing awareness that many savers could be caught out, and not reimbursed in the event of a bank failure because their savings exceed the coverage levels in their country. The minimum coverage level of €20.000 has not been adjusted since 1994 and is no longer adequate in a number of countries given the distribution of savings. There is evidence suggesting that the competitive distortions created by different national measures are having a real and disturbing impact on deposit taking.
Moreover, the current payout delay of three months does not meet depositors' needs and expectations.
The Council of the European Union agreed on 7 October 2008, that it is a priority is to restore confidence and proper functioning of the financial sector. It committed to take all necessary measures to protect the deposits of individual savers and welcomed the intention of the Commission to bring forward urgently an appropriate proposal to promote convergence of deposit guarantee schemes. Therefore, the Directive should be revised in three key areas:
- Increase of the minimum coverage level
- Reduction of the payout delay to a maximum of 3 days
- Termination of co-insurance
Due to the urgency of the matter, neither an impact assessment nor a public consultation could be carried out for the current proposal.
However, the Commission gained important insights from its review process of Directive 94/19/EC. In the context of the Commission communication of 2006, the Commission notably asked the Commission’s Joint Research Centre for submitting reports on the coverage level (2005), the possible harmonisation of funding mechanisms (2006/7) and the efficiency of deposit guarantee schemes (2008). This work was supported by the European Forum of Deposit Insurers (EFDI), in particular concerning obstacles to a rapid payout to depositors. This work has been taken into account for the current proposal.
The reports are available on the following web site:ec.europa.eu/internal_market/bank/guarantee
Contents
The proposal has no implication for the Community budget.
A Directive amending the current directive is the most appropriate instrument. The proposal is based on Article 47 i of the Treaty, which is the legal basis to adopt Community measures aimed at achieving the Internal Market in financial services.
In accordance with the principles of subsidiarity and proportionality as set out in Article 5 EC, the objectives of the proposed action, cannot be sufficiently achieved by the Member States and can therefore be better achieved by the Community. Its provisions do not go beyond what it is necessary to achieve the objectives pursued.
Only Community legislation can ensure that credit institutions operating in more than one Member State are subject to similar requirements concerning Deposit Guarantee Schemes, which ensures a level playing-field, avoids unwarranted compliance costs for cross-border activities and thereby promotes further single market integration. Community action also ensures a high level of financial stability within the EU.
The current payout delay of three months, which can even be extended to nine months, is detrimental to the confidence of depositors and does not meet their needs. Many depositors can be expected to face significant financial difficulties already within less than one week. Therefore, the payout delay should be reduced to three days, without a possibility extension.
However, the deadline should commence only when either the competent authorities have determined that the credit institution appears to be unable to repay the deposit or a judicial authority has ruled that the claims of depositors are suspended. The decision of the competent authorities may take up to 21 days after first becoming satisfied that a credit institution has failed to repay deposits. In the interest of a rapid payout, this period of 21 days should be reduced to 3 days.
Currently, only inter-bank deposits and deposits linked to money-laundering activities are excluded from payout under Article 2.
Under Article 7 i in conjunction with Annex 1, Member States can choose to further exercise 14 additional exclusions from payout. These include, inter alia, deposits from the financial and public sectors, close relatives of the bank's auditor and deposits by companies which are of 'such a size that they are not permitted to draw up abridged balance sheets pursuant to Article 11 of Directive 78/660/EEC'. It seems obvious that most of the exclusions create significant obstacles in any attempt to make a rapid payout. It is thus imperative that such exclusions should no longer apply. For the purposes of rapid payout, a scheme should cover only retail deposits. However, Member States should have the option to include other depositors provided that this inclusion does not impede rapid payouts.
The current Directive allows an optional co-insurance of up to 10%, i.e. a certain percentage of losses that is borne by the depositor. This has proven counter-productive for the confidence of depositors and may have exacerbated the problems. The argument of moral hazard (depositors should be punished if they deposit their funds at a bank offering high interest rates but incurring high risks) is not tenable since retail depositors cannot, in general, judge the financial soundness of their bank. Consequently, this option should be discontinued.
The current minimum coverage level is set at EUR 20 000 with the option for Member States to determine a higher coverage. However, this does not reflect the current average deposits of approximately EUR 30 000 per EU citizen. In order to maintain depositors' confidence, the coverage level should be raised significantly.
The Council of the European Union agreed on 7 October 2008 that all Member States would, for an initial period of at least one year, provide deposit guarantee protection for individuals for an amount of at least EUR 50 000, acknowledging that many Member States determine to raise their minimum to at least EUR 100 000. Therefore, the minimum coverage level should be first raised to at least EUR 50 000 and, after one year, to at least EUR 100 000. According to estimates, about 65% of eligible deposits are covered under the current regime. The new amounts would cover an estimated 80% (with coverage of EUR 50 000) and 90% (with coverage of EUR 100 000) of deposits.
Changes of the coverage level should be subject to the standard comitology procedure. However, in emergency situations, prompt action, coordinated across the Community, would be needed to increase the level of coverage to address any sudden loss of depositor confidence. Therefore, an emergency comitology measure is critical. Such emergency measures should be restricted to 18 months.
A deposit guarantee scheme does not only cover depositors in the Member State where the bank is authorized (home country) but also covers depositors at the bank's branch in another Member State (host country). If the host country's deposit guarantee scheme offers a higher level of coverage than the home country's scheme, the branch may also join the host country's scheme to offer the same coverage as the banks that are authorized in the host country.
Whether or not the bank has joined the host country's scheme, it is essential that home and host schemes cooperate with each other to ensure rapid payout. The proposal, therefore, explicitly introduces a general obligation for schemes to cooperate with each other.