Explanatory Memorandum to COM(2010)368 - Deposit Guarantee Schemes [recast] - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2010)368 - Deposit Guarantee Schemes [recast]. |
|---|---|
| source | COM(2010)368  |
| date | 12-07-2010 |
No bank, whether sound or ailing, holds enough liquid funds to redeem all or a significant share of its deposits on the spot. This is why banks are susceptible to the risk of bank runs if depositors believe that their deposits are not safe and try to withdraw them all at the same time. This can seriously affect the whole economy. If, despite the high level of prudential supervision, a bank has to be closed, the relevant Deposit Guarantee Scheme (DGS) reimburses depositors up to a certain ceiling (the ‘coverage level’), thereby meeting depositors’ needs. DGSs also save depositors from having to participate in lengthy insolvency proceedings, which usually lead to insolvency dividends that represent only a fraction of the original claim.
Following the Commission communication in 2006 concerning the review of Directive 94/19/EC on Deposit Guarantee Schemes i, events in 2007 and 2008 showed that the existing, fragmented DGS system has not delivered on the objectives set by Directive 94/19/EC on Deposit Guarantee Schemes, in terms of maintaining depositors’ confidence and financial stability in times of economic stress. The current about 40 DGS in the EU which cover different groups of depositors and deposits up to different coverage levels, impose different financial obligations on banks and therefore limit the benefits of the internal market for banks and depositors. Moreover, schemes have proved to be underfinanced in times of financial stress.
On 7 October 2008, the Council of the European Union agreed confidence in the financial sector had to be restored and encouraged the Commission to bring forward an appropriate proposal to promote convergence of DGSs. This led to the adoption of Directive 2009/14/EC i. However, given that the need for swift negotiations precluded tackling all the open issues, this Directive was only an emergency measure to maintain depositors’ confidence, in particular by increasing the coverage level from € 20 000 to € 100 000 by the end of 2010. Directive 2009/14/EC therefore contained a clause providing for a broad review of all aspects of DGSs. The need to reinforce DGSs by presenting appropriate legislative proposals was reiterated in the Commission communication of 4 March 2009 Driving European recovery i.
The main elements of this proposal are:
· Simplification and harmonisation, in particular as to the scope of coverage and the arrangements for payout;
· Further reduction of the time limit for paying out depositors and better access for DGS to information about their members (i.e. banks);
· Sound and credible DGSs that are sufficiently financed;
· Mutual borrowing between DGSs, i.e. a borrowing facility in certain circumstances.
The elements of the review which, in the Commission’s view, should not (or not yet) be subject to legislation are set out in the report accompanying this proposal. The report and the proposal are part of a package on guarantee schemes in the financial sector, which also comprises a review of investor compensation schemes (Directive 97/9/EC) and a white paper on insurance guarantee schemes.
A public consultation was held from 29 May to 27 July 2009. All 104 contributions and a summary report were published in August 2009 i and stakeholders’ views were in general taken into account. Four issues were raised by many respondents (mainly banks and their associations, consumers and their associations, Member States and DGSs) and therefore merit particular attention:
· Nearly all respondents were in favour of simplification and harmonisation of eligibility criteria for depositors. This has been taken into account.
· A clear majority of respondents was against further reducing the deadline for payout; many argued that experience with the new deadline of 4-6 weeks set out in Directive 2009/14/EC should first be assessed before a further reduction is envisaged. The Commission maintains that the current deadline is too long to prevent bank runs and to meet depositors’ financial needs. A clear majority of respondents supported involving DGSs at an early stage when it becomes likely that the DGS is triggered. This was considered essential for a shorter payout deadline and is reflected in the proposal.
· A large majority of respondents was in favour of ex-ante funding of schemes, and of risk-based contributions to DGSs. This has been taken into account.
· Opinions were divided on whether or not mutual guarantee schemes should be covered by the Directive. These are schemes which protect the credit institution itself and, in particular, ensure its liquidity and solvency. Such systems guarantee a different protection for depositors in comparison to the protection provided by a Deposit Guarantee Scheme. If, due to the support of a mutual scheme, a bank does not fail and its services are provided continuously, it is not necessary to reimburse depositors. In contrast to this, a Deposit Guarantee Scheme is only triggered when a bank fails. However, the current proposal leaves the stabilising function of mutual schemes intact, but improves the position of depositors, who will now have a claim against them if they cannot prevent the failure of a member.
External expertise was used to prepare this proposal. In March 2009, an informal roundtable with experts was held i. Member States’ expertise was provided at the three meetings of the Working Group on Deposit Guarantee Schemes (DGSWG), in June and November 2009 and in February 2010. The Commission’s Joint Research Centre (JRC) submitted reports on the coverage level (2005), possible harmonisation of funding mechanisms (2006 and 2007), the efficiency of deposit guarantee schemes (2008) and possible models for introducing risk-based contributions in the EU (2008 and 2009) i. This work was supported by the European Forum of Deposit Insurers (EFDI), which in 2008 also finalised several reports on specific issues i. This work has been taken into account in drafting the current proposal. The ECB was also closely involved in the preparation of this proposal.
A directive amending the current directive is the most appropriate instrument. The Commission is aware of the cumulative effects of current and future legislative measures concerning the banking sector.
Altogether, over 70 different policy options were assessed. The main options identified as preferable are:
· Simplifying and harmonising the scope of coverage;
· Reducing the payout deadline to seven days;
· Ending the practice of setting off depositors’ liabilities against their claims;
· Introducing an information template to be countersigned by a depositor and a mandatory reference to DGSs in account statements and advertisements;
· Harmonising the approach to the funding of DGSs;
· Setting a target level for DGS funds;
· Fixing the proportions of ex-ante and ex-post bank contributions to DGS;
· Introducing risk-based elements for bank contributions to DGS;
· Restricting the use of DGS funds for broader bank resolution purposes benefiting of all creditors of a bank;
· Having the host country DGS act as a single point of contact for depositors at branches in another Member State.
The proposal will ensure that, in the event of a bank failure, depositors are reimbursed up to € 100 000 by a DGS within seven calendar days. This will make the intervention of social welfare systems almost unnecessary. The impact assessment report is available at: ec.europa.eu/internal_market/bank/guarantee A summary is attached to this proposal.
The proposal will not entail any significant administrative burden and simplifies the eligibility criteria for depositors. The impact assessment report contains additional information.
Since bank failures are unpredictable and are avoided if possible, the functioning of DGSs cannot be regularly monitored on the basis of how real bank failures are handled. However, there should be regular stress tests of DGSs to show whether they are capable of meeting the legal requirements, at least in an exercise scenario. This should be part of a peer review conducted by the European Forum of Deposit Insurers (EFDI) i and the future European Banking Authority (EBA).
Contents
- Legal elements of the proposal
- Budgetary implications
- 2. Consultation of interested parties and external expertise
- 3. Impact assessment
- 3.1. Preferred options
- 3.2. Social impact
- 3.3. Administrative burden
- 4. Monitoring and evaluation
- 7. Detailed explanation of the proposal
- 7.1. Scope, definitions and supervision (Articles 1-3)
- 7.2. Eligibility criteria and determination of the repayable amount (Articles 4-6)
- 7.3. Payout (Articles 7 and 8)
- 7.4. DGS financing and borrowing between DGS (Articles 9 and 10)
- 7.5. Risk-based contributions to DGSs (Article 11 and Annex I and II)
- 7.6. Cross-border cooperation (Article 12)
- 7.7. Depositor information (Article 14 and Annex III)
- 7.8. New supervisory architecture
A directive amending the current directive is the most appropriate instrument. Since Directive 2009/14/EC amending Directive 94/19/EC has not been completely implemented, both Directives should be consolidated and amended by means of a recast.
Directive 94/19/EC constitutes an essential instrument for the achievement of the Internal Market from the point of view of both the freedom of establishment and the freedom to provide financial services, in the field of credit institutions. Consequently, its legal basis is Article 57 i of the Treaty establishing a European Community, which preceded Article 53 i of the Treaty on the Functioning of the EU (TFEU). In conjunction with Article 54 i, Article 53 TFEU provides for issuing Directives concerning the taking-up and pursuit of companies such as credit institutions. Therefore, this proposal is based on Article 53 i TFEU. All elements of this proposal serve this objective and are ancillary to it.
In accordance with the principles of subsidiarity and proportionality set out in Article 5 TFEU, the objectives of the proposed action cannot be sufficiently achieved by the Member States and can therefore be better achieved by the EU. Its provisions do not go beyond what is necessary to achieve the objectives pursued. Only EU action can ensure that credit institutions operating in more than one Member State are subject to similar requirements for DGSs, and thereby ensure a level playing field, avoid unwarranted compliance costs for cross-border activities and promote further integration in the EU market. EU action also ensures a high level of financial stability in the EU. Harmonising coverage and payout deadlines, in particular, cannot be sufficiently achieved by Member States because it means bringing into line a multitude of different rules under the legal systems of various Member States, and can therefore be better achieved at EU level. This has been acknowledged in the existing Directives on DGSs i.
The proposal has no implications for the EU budget.
The recast gave the Directive a better and more comprehensive structure. Many outdated references were amended. Article headings make it easier to read. Articles on the scope of the Directive and a number of new definitions make it easier to understand. The Directive describes the features of DGSs, before laying down coverage levels. Articles dealing with payout are followed by rules on financing and on the information to be given to depositors.
The Directive now encompasses all credit institutions and all schemes, without distinction. All banks must join a DGS; they cannot be exempted. This ensures that depositors always have a claim against a scheme and that all schemes must be soundly financed.
Mutual guarantee schemes protect depositors by protecting the credit institution itself (see chapter 2). Since all banks must now join a DGS, mutual guarantee schemes can either be recognised as DGSs and in this case must meet the requirements set out in Directive 2006/48/EC in order to ensure consistency in EU law. Alternatively, mutual schemes and DGS could be set up separately. In the latter case, a dual membership of a bank in both schemes and the additional safeguard role of mutual schemes can be taken into account when the contributions to the DGS are set.
Deposits are now defined more clearly. Only entirely repayable instruments can be deemed deposits, not structured products, certificates or bonds. This prevents DGSs from taking unpredictable risks with investment products.
All DGSs must now be supervised on an ongoing basis and they must perform regular stress tests of their systems. DGSs now have the right to obtain information from banks at an early stage in order to enable fast payout. Member States are now explicitly allowed to merge their DGSs. Credit institutions now have to be given one month’s notice, not 12 months’, before they can be excluded from a DGS.
Depositors’ eligibility has been simplified and harmonised. Most discretionary exclusions have become mandatory, in particular the exclusion of authorities and financial institutions of any kind. On the other hand, deposits in non-EU currencies are covered under the law and so are the deposits of all non-financial companies.
The coverage level of EUR 100 000 (to be implemented by end of 2010 under Directive 2009/14/EC) has not been amended. However, Member States may decide to cover deposits arising from real estate transactions and deposits relating to particular life events above the limit of EUR 100 000 , provided that the coverage is limited to 12 months.
It is now stipulated that interest due but not credited at the time of failure must be repaid, provided that the coverage level is not exceeded. Depositors must now be paid out in the currency in which the account was managed. Setting off claims against the depositor’s liabilities is no longer permitted after an institution fails.
The DGS must now act to repay depositors within one week. Depositors do not need to submit an application. Any information they are given must be in the official language(s) of the Member State where the deposit is located. The Directive now stipulates that depositors’ unacknowledged or unpaid claims against DGS can only be time-barred to the extent that the DGS’s claims in the liquidation or reorganisation proceedings are time-barred.
In order to meet such a short payout deadline, the competent authorities are obliged to inform DGSs by default if a bank failure becomes likely. Moreover, DGSs and banks must exchange information on depositors, domestically and across borders, unfettered by confidentiality requirements. Credit institutions must also be in a position to provide the aggregated deposits of a depositor (‘single customer view’) at any time.
The Directive now ensures that DGSs’ available financial means are proportionate to their potential liabilities. These financial means are safeguarded against potential losses by restrictions on investment similar to those for electronic money institutions under Article 7 of Directive 2009/110/EC i and UCITS under Article 52 of Directive 2009/64/EC i, taking into account the need for lower risk and higher liquidity. The financing of DGS will be based on the following subsequent steps:
First, in order to ensure sufficient funding, DGSs must have 1.5 % of eligible deposits on hand after a transition period of 10 years (this is referred to as the ‘target level’). If these financial means turn out to be insufficient in the event of a bank failure, the second and third steps below must be taken.
Second, banks must pay extraordinary (‘ex-post’) contributions of up to 0.5 % of eligible deposits if necessary. (If making this payment jeopardises a bank, it may be exempted by the competent authorities on an individual basis.) Consequently, ex-ante funds will account for 75 % of DGSs’ financing and ex-post contributions 25 %.
Third, a mutual borrowing facility allows a DGS in need to borrow from all other DGSs in the EU, which, altogether, must, if needed, lend to the DGS a maximum of 0.5 % of its eligible deposits in need on short notice, proportionate to the amount of eligible deposits in each country. The loan must be repaid within five years and new contributions to the DGS must be raised to reimburse the loan. To secure repayment, the lending DGSs have the right to subrogate into the claims of depositors against the failed credit institution and these claims will rank first in the liquidation procedure of the credit institution whose failure depleted the borrowing DGS.
As a fourth and last line of defence against taxpayers’ involvement, DGSs must have in place alternative funding arrangements, recalling that those arrangements must comply with the monetary financing prohibition laid down in Article 123 TFEU.
Only after 10 years, this four-step mechanism will become operational. In order to adapt the target level to schemes’ potential liabilities, it will be recalibrated on the basis of covered deposits (i.e. taking into account the coverage level), but without diminishing the level of protection.
DGS funds should principally be used for paying out depositors. This, however, does not prevent their use for bank resolution purposes in accordance with state aid rules. However, to avoid the depletion of funds for the benefit of a bank’s uninsured creditors, such use must be limited to the amount that would have been necessary to pay out covered deposits. Given that bank resolution and payout have different purposes, DGS funds should be ring-fenced already when the target level is build up, ensuring that the primary function of DGSs, i.e. deposit payout, is not impeded. This is without prejudice to the future Commission policy concerning bank resolution funds.
Contributions from credit institutions to DGSs must be calculated according to their risk profiles in a harmonised way. In principle, contributions consist of both non-risk and risk-based elements. The latter will be calculated on the basis of several indicators reflecting the risk profiles of each credit institution. The proposed indicators cover the key risk classes commonly used to evaluate the financial soundness of credit institutions: capital adequacy, asset quality, profitability and liquidity. The data necessary to compute those indicators are available under existing reporting obligations.
Taking into account differences between banking sectors in Member States, the Directive ensures some flexibility by developing a set of core indicators (mandatory for all Member States) and another set of supplementary indicators (optional for Member States). The core indicators consist of commonly used criteria such as capital adequacy, asset quality, profitability and liquidity. Core indicators weigh 75 % and supplementary indicators 25 %.
This approach to calculating risk-based contributions relies on the Commission (Joint Research Centre) reports of 2008 and 2009, and also reflects current approaches in some Member States i. In general, the Directive requires that the total amount of contributions to be collected by DGS should first be determined in line with the target level for DGS funds; then the amount should be apportioned among DGS member banks according to their risk profiles. Consequently, the Directive provides incentives for sound risk management and discourages risky behaviour by clearly differentiating between the levels of contribution paid by the least and most risky banks (from 75 % to 200 % of the standard amount, respectively).
As to the non-risk element, the contribution base is the amount of eligible deposits, as is currently the case in most Member States. However, over time, covered deposits (i.e. eligible deposits not exceeding the coverage level) will become the contribution base in all Member States as they better reflect the risk to which DGSs are exposed.
A full harmonisation of the calculation of risk-based contributions should be achieved at a later stage.
In order to facilitate the payout process in cross-border situations, the host country DGS acts as a single point of contact for depositors at branches in another Member State. This includes not only communication with depositors in that country (acting as a ‘post box’) but also paying out on behalf of the home country DGS (acting as a ‘paying agent’). Agreements between DGSs will facilitate this function.
Schemes have to exchange relevant information with each other. Mutual agreements will facilitate this.
Banks reorganising themselves in a way that causes their membership of one DGS to cease and entails membership in another DGS will be reimbursed their last contribution so that they can use these funds to pay the first contribution to the new DGS.
Depositors are now better informed about whether their deposits are covered and about how a DGS functions. To this end, before making a deposit, depositors must now countersign an information sheet based on the template set out in Annex III, which contains all relevant information about the coverage of the deposit by the responsible DGS. Existing depositors must be informed accordingly on the statements of account. Advertising on deposit products must be limited to a factual reference to coverage by the DGS, in order to avoid using the DGS as a marketing argument.
The regular disclosure of specific information by DGSs (ex-ante funds, ex-post capacity, results of regular stress testing) ensures transparency and credibility, leading to enhanced financial stability with insignificant costs (see impact assessment report for more details)..
On 23 September 2009, the Commission adopted proposals for Regulations establishing the European System of Financial Supervisors, including the creation of the three European supervisory authorities and the European Systemic Risk Board. The new European Banking Authority should, within the powers conferred to it by the Regulation, collect information on the amount of deposits, conduct peer review analyses, confirm whether a DGS can borrow from other DGSs, and settle disagreements between DGSs.