EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation, and transparency - Main contents

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dossier	COM(2023)228 - Amendment of Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, ...
source	COM(2023)228
date	18-04-2023

1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

The proposed amendments to Directive 2014/49/EU ¹ (the Deposit Guarantee Schemes Directive or DGSD) are part of the crisis management and deposit insurance (CMDI) legislative package that includes also amendments to Directive 2014/59/EU ² (the Bank Recovery and Resolution Directive or BRRD) and Regulation (EU) No 806/2014 ³ (the Single Resolution Mechanism Regulation or SRMR).

The EU crisis management framework is well-established, however, previous episodes of bank failures have shown that there is need for improvements. The aim of the CMDI reform is to build on the objectives of the crisis management framework and to ensure a more consistent approach to resolution, so that any bank in crisis can exit the market in an orderly manner, while preserving financial stability, taxpayer money and ensuring depositor confidence. In particular, the existing resolution framework for smaller and medium-sized banks needs to be strengthened with respect to its design, implementation and, most importantly, incentives for its application, so that it can be more credibly applied to those banks. Moreover, the depositor protection framework should be improved to ensure a coherent application of rules and a better level playing field, while protecting financial stability, enhancing depositors’ confidence and preventing contagion.

Context of the proposal

In the aftermath of the global financial and sovereign debt crises, the EU took decisive actions, in line with international calls for reform, to create a safer financial sector for the EU single market. This included providing the tools and powers to handle the failure of any bank in an orderly manner, while preserving financial stability, public finances and depositor protection. The Banking Union was created in 2014 and is currently made up of two pillars: a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM). However, the Banking Union is still incomplete and is missing its third pillar: a European deposit insurance scheme (EDIS)⁴. The Commission’s proposal adopted on 24 November 2015 to establish EDIS ⁵ is still pending.

The Banking Union is supported by a Single Rulebook which, in what concerns the CMDI, is made up of three EU legal acts adopted in 2014: the BRRD, the SRMR and the DGSD. The BRRD defines the powers, rules and procedures for the recovery and resolution of banks, including cross-border cooperation arrangements to tackle cross-border banking failures. The SRMR creates the Single Resolution Board (SRB) and the Single Resolution Fund (SRF) and defines powers, rules and procedures for the resolution of the entities established in the Banking Union, in the context of the Single Resolution Mechanism. The DGSD ensures the protection of depositors and sets-out the rules for the use of DGS funds. The BRRD and the DGSD apply in all Member States while the SRMR applies in Member States participating in the Banking Union.

The 2019 banking package, also known as the ‘risk reduction package’, revised the BRRD, the SRMR, the Capital Requirements Regulation (CRR ⁶) and the Capital Requirements Directive (CRD ⁷). These revisions included measures delivering on the EU’s commitments made in international fora ⁸ and took further steps towards completing the Banking Union by providing credible risk reduction measures to mitigate threats to financial stability.

In November 2020, the Eurogroup agreed on the creation and early introduction of a common backstop to the SRF by the European Stability Mechanism (ESM)⁹.

The crisis management and deposit insurance (CMDI) reform and the broader implications for the Banking Union

Together with the CMDI reform, a complete Banking Union, including its third pillar, EDIS, would offer a higher level of financial protection and confidence to EU’s households and businesses, increase trust and strengthen financial stability as necessary conditions for growth, prosperity and resilience in the Economic and Monetary Union and in the EU more generally. The Capital Markets Union complements the Banking Union as both initiatives are essential to finance the twin transitions (digital and green), step up the international role of the euro and strengthen the EU’s open strategic autonomy and its competitiveness in a changing world, particularly considering the current challenging economic and geopolitical environment ¹⁰^, ¹¹.

In June 2022, the Eurogroup did not agree to a more comprehensive work plan to complete the Banking Union by including EDIS. Instead, the Eurogroup invited the Commission to table more targeted legislative proposals for reforming the EU framework for bank crisis management and national deposit insurance ¹².

In parallel, the European Parliament, in its 2021 annual report on the Banking Union ¹³, also stressed the importance of completing it with the establishment of EDIS and supported the Commission in putting forward a legislative proposal on the CMDI review. While EDIS was not explicitly endorsed by the Eurogroup, it would make the CMDI reform more robust and would deliver synergies and efficiency gains for the industry. Such a legislative package would be part of the agenda for completing the Banking Union, as emphasised in President von der Leyen’s Political Guidelines, which also recalled the importance of EDIS, and as regularly supported by leaders ¹⁴.

The objectives of the Deposit Guarantee Schemes Directive (DGSD)

The DGSD harmonised the deposit protection mechanisms across the EU. Deposit protection is key to improve depositors’ confidence, strengthen the financial stability of the banking system and safeguard the functioning of the single market. To that end, at least one deposit guarantee scheme (DGS) was set up in every Member State to ensure fast reimbursement of depositors in the event of bank failures (payout) and a harmonised level of protection was set at EUR 100 000. Importantly, DGSs also play a role in banks’ crisis management. They can contribute to resolution or finance other measures, thus preserving depositors’ access to covered deposits.

Reasons for the proposal

In line with the mandate under Article 19(6) DGSD, the Commission conducted a comprehensive evaluation on how the DGSD performed. Its conclusion confirmed that the DGSD’s main components, particularly the standard coverage level of EUR 100 000 per depositor per bank, the minimum target level for DGS funding, and the short timelines for depositor payout, overall, generated positive benefits for depositors.

However, practical experience in applying this framework has shown that there are areas for improvement. These areas concern the scope of depositor protection, the divergent interpretation of conditions for the use of DGS funds for interventions outside the payout of covered deposits, the operational effectiveness and efficiency in the way DGSs work, broad national discretions and options and a need for improved coordination between resolution and deposit insurance safety nets.

As an integral part of the Commission’s CMDI legislative review, the DGSD proposal is largely based on the preparatory work and on the recommendations developed by the European Banking Authority (EBA) in its five opinions¹⁵ on the application of the DGSD and takes into account instances where its practical application failed to achieve some of its important objectives or achieved them only partially.

Summary of the Deposit Guarantee Schemes Directive (DGSD) amendments as part of the crisis management and deposit insurance (CMDI) reform

The DGSD proposal covers a range of policy aspects and constitutes a coherent response to the identified problems. It therefore aims to:
The proposal amends the following provisions of the DGSD:

1. The DGSD proposal covers a range of policy aspects and constitutes a coherent response to the identified problems. It therefore aims to:

clarify the scope of depositor protection by addressing identified discrepancies to offer EU depositors a harmonised and robust level of protection;

harmonise the least cost test for all types of DGS interventions outside the payout of covered deposits in insolvency, to improve the level playing field and ensure consistency of outcomes when managing bank failures;

improve the functioning of DGSs by simplifying administrative procedures, while improving the transparency of their financial robustness and use of funds;

increase the convergence in DGS practices and among authorities; and

improve cross-border cooperation between DGSs in reimbursing depositors located in other EU Member States, or in case of change of DGS affiliation by banks.

• Consistency with existing policy provisions in the policy area

The proposal builds on and strengthens the existing deposit insurance framework set out in the DGSD. To that end, many elements of the proposal follow the work undertaken by the EBA, in cooperation with national DGSs and designated authorities. It proposes amendments to reflect the practical experience gained from the national transposition of EU law and from the application of some provisions, including in the context of the Banking Union. The proposal is initiated in parallel with the reviews of the BRRD and the SRMR to ensure the overall consistency of the EU bank crisis management framework.

• Consistency with other Union policies

The proposal builds on the reforms carried out in the aftermath of the financial crisis that led to the creation of the Banking Union and the single rulebook for all EU banks.

By strengthening depositor confidence and financial stability, the proposal contributes to the resilience of the EU banking sector and its ability to support economic recovery following the COVID-19 pandemic, in line with the political objectives of the European open strategic autonomy. More specifically, the proposal also improves consumer protection by harmonising the level and period of protection of specific retail deposits that are short-term and contingent on specific life events (‘temporary high balances’) or by strengthening information disclosure to consumers.

In addition, to mitigate the risk that DGSs reimburse depositors involved in money laundering and terrorist financing (ML/TF) activities, the amendments build on Directive (EU) 2015/849 on anti-money laundering and take into account the direction proposed in the Commission’s legislative package on the EU anti-money laundering/countering the financing of terrorism (AML/CFT) regime, adopted on 20 July 2021.

To strengthen the enforceability of the DGSD rules, the amendments refer to the supervisory powers laid down in Directive 2013/36/EU (Capital Requirements Directive or CRD). This approach enshrines the notion that compliance with DGS requirements is a first-order requirement for all banks and provides ground for the sequencing of events to discipline a bank that would fail to fulfil such obligations.

The amendments also harmonise and clarify the rules applicable to preventive and alternative measures financed by DGS funds. These rules must be appreciated in connection with the already existing requirements on State aid for financial establishments set out in the Commission’s Banking Communication¹⁶.

The amendments also add clarity to the protection of client funds held by non-bank financial institutions in a bank in line with the requirements for segregating client funds as set out in the Payment Services Directive ¹⁷, the E-money Directive and Commission Delegated Directive (EU) 2017/593 ¹⁸. In view of rapid developments in innovative financial services, the clarification aims at building clients’ trust in non-bank financial institutions and in their business continuity if a bank failure occurs.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

The proposal amends an existing directive, the DGSD, in particular as regards the improved application of the tools that are already available in the deposit protection framework.

Consequently, the legal basis for the proposal is the same as the legal basis of the original legislative act, namely Article 53(1) of the TFEU on the right of establishment, the same legal basis as the directive being amended. According to EU case law ¹⁹, where a legislative act is designed merely as a supplement or a correction of another legislative act, without altering its original goal, the EU legislature is fully entitled to base the latter act on the legal basis of the first act.

• Subsidiarity (for non-exclusive competence)

The amendments to the DGSD comply with the subsidiarity principle. National rules cannot achieve a harmonised level of depositors’ protection and a uniform set of rules on funding and functioning of DGSs. EU action is therefore needed to ensure a level playing field across the EU and avoid undue competitive advantages among financial institutions linked to divergent rules on deposits protection. The EBA also underlined this in its opinions on the review of the DGSD.

Moreover, the establishment of banks and the provision of banking services, including deposit taking, can be conducted cross-border. The cross-border nature of banking systems can create many challenges for DGSs (changes of DGS affiliation of a bank, record keeping of clients or cross-border cooperation), which create a need for EU intervention.

Most of the amendments in the proposal update existing EU law, and, as such, concern areas where the EU has already exercised its powers. Several actions in the proposal introduce an additional degree of harmonisation to consistently achieve the objectives defined by the DGSD.

• Proportionality

The amendments are proportionate to what is necessary to achieve the objectives of the DGSD.

The amendments establish common requirements to improve and harmonise the level of depositor protection within the EU. However, the proposal does not govern the organisational models, legal structure or internal governance of EU DGSs. Therefore, the established EU deposit insurance set-up relies on, and will continue relying on, a network of national DGSs, organised in line with different models (public DGS, private DGS, institutional protection schemes (IPS)) and types of relationships between the DGS designated authority and the resolution authority (under a same umbrella entity or in distinct institutions).

Moreover, the proposal confers considerable powers to national authorities, starting with the execution of the least cost test that determines the cost-efficiency in the use of DGS funds. Most topics covered by the proposal (on common level of temporary high balances, protection of client funds, protection of public authorities) relate to areas where EU Member States explicitly asked for an EU-wide standard in order to provide more legal certainty in protecting depositors. The mandates for the EBA provided for under the proposal (through guidelines and standards) are limited to the most technical DGSD topics for which a more detailed explanation of requirements is needed.

The proposal also maintains existing provisions that recognise national specificities and ensure a proportionate application of the DGSD rules, e.g. through the choice of national options, the possibility for certain Member States to apply a lower target level or for IPS members to benefit from reduced contributions.

• Choice of the instrument

It is proposed that the measures be implemented by amending the DGSD through a directive. The proposed measures refer to or further develop already existing provisions incorporated in this legal instrument. As deposit insurance is closely linked to non-harmonised areas of national law, such as insolvency law, transposition is necessary to best integrate the proposed provisions into national law.

3. RESULTS OF EX POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex post evaluations/fitness checks of existing legislation

The CMDI framework was designed to avert and manage the failure of institutions of any size or business model. It was developed with the objectives of maintaining financial stability, protecting depositors, minimising the use of public support, limiting moral hazard, and improving the internal market for financial services. The evaluation concluded that, overall, the CMDI framework should be improved in certain respects.

In particular, the evaluation shows that legal certainty and predictability in managing bank failures remain insufficient. The decision of public authorities on whether to resort to resolution or insolvency may differ considerably across Member States. In addition, safety nets financed by the industry are not always effective and divergent access conditions to funding in resolution and outside resolution persist. These affect incentives and create opportunities for arbitrage when decisions are made on what crisis management tool to use. Finally, depositor protection remains uneven and inconsistent across Member States in a number of areas.

• Stakeholder consultations

The Commission conducted extensive exchanges through different consultation tools to reach out to all stakeholders involved, in order to better understand how the framework performed as well as the possible scope for improvements.

In 2020, the Commission launched a consultation on a combined inception impact assessment and a roadmap aimed at providing a detailed analysis of actions to be taken at EU level and the potential impact of different policy options on the economy, society and the environment.

In 2021, the Commission launched two consultations: a targeted and a public consultation to seek stakeholder feedback on how the CMDI framework was applied and views on possible modifications. The targeted consultation, comprising 39 general and specific technical questions, was available in English only and open from 26 January to 20 April 2021. The public consultation consisted of 10 general questions, available in all EU languages and ran over the feedback period from 25 February to 20 May 2021. A report summarising the feedback to this consultation was published on 07 July 2021 ²⁰. The consultations showed that most respondents considered that deposits of public, including local authorities, should also be protected by the DGS. Most banks and DGSs considered that the current regular information disclosure was sufficient and that no changes were needed. Digital communication was often considered as the most suitable means to save costs.

In addition, the Commission hosted a high-level conference on 18 March 2021 gathering representatives from all relevant stakeholders. The conference confirmed the importance of an effective framework but also highlighted the current weaknesses. Panellists at the conference noted that the DGSD framework would benefit from further harmonisation and a better interplay with the rules set out in the Anti-money laundering directive (AMLD), the Payment services directive and State aid rules. Also, consumer confidence and trust should be reflected in the DGSD review as well as the situation in smaller markets.

Commission staff have also repeatedly consulted Member States on the EU implementation of the CMDI framework and on possible revisions of the BRRD/SRMR and DGSD in the context of the Commission Expert Group on Banking, Payments and Insurance. In parallel to the discussions in the Expert Group, the issues addressed in this proposal were also covered in meetings of the Council’s preparatory bodies, namely the Council Working Party on Financial Services and the Banking Union and the High-Level Working Group on EDIS.

Furthermore, during the preparatory phase of the legislation, Commission staff also held numerous meetings (physical and virtual) with representatives of the banking industry and with other stakeholders.

The results of all the above-mentioned initiatives have fed into the preparation of this proposal and the accompanying impact assessment. They have provided clear evidence of the need to update and complete the current rules to best achieve the objectives of the framework. Annex 2 of the impact assessment provides the summaries of these consultations and the public conference.

• Collection and use of expertise

To support its work on the DGSD review, the Commission issued a comprehensive call for advice to the EBA²¹.The EBA responded by submitting five opinions. The first opinion on the eligibility of deposits, coverage level and cooperation between deposit guarantee schemes was submitted in August 2019²². The second opinion on deposit guarantee scheme payouts was submitted in October 2019²³. The third opinion on deposit guarantee scheme funding and uses of deposit guarantee scheme funds was submitted in January 2020²⁴. The fourth opinion on the treatment of client funds was submitted in October 2021²⁵. Additionally, the Commission took into account the 2020 EBA’s opinion on the interplay between the EU Anti-money laundering directive and the EU Deposit guarantee schemes directive²⁶ and the 2021 EBA’s biennial opinion on risks of money laundering and terrorist financing (ML/TF) affecting the EU's financial sector²⁷.

Furthermore, the Commission contracted the Centre for European Policy Studies (CEPS) to provide two reports on deposit insurance, entitled ’Harmonising insolvency laws in the Euro area’²⁸ and ’Options and national discretions under the DGSD’²⁹, that were published respectively in December 2016 and November 2019.

In addition to consulting stakeholders, the Commission participated in discussions and exchange of views informing the work of the EBA’s task force on deposit guarantee schemes and the Expert Group on Banking, Payments and Insurance.

• Impact assessment ³⁰

This proposal shares its impact assessment (IA) with the proposals reviewing the BRRD and the SRMR, which takes into account the feedback received from stakeholders and the need to address various interconnected issues spanning over three different legal texts. Annex 6 of the IA describes the issues around the current functioning of the DGS, sets out the possible scenarios for its improvement and justifies the policy options retained in the proposed amendments. It concludes that the DGSD has been broadly effective in improving the level of depositor protection across the EU. However, the application of the DGSD safeguards remains uneven among national DGSs, highlighting the need for harmonised rules to address divergences that have adverse impacts on depositors. It also highlights the need to clarify the coverage for certain types of depositors.

All policy options take into account the EBA’s suggestions and the subsequent feedback received from Member States’ experts in the Commission’s Expert Group on Banking, Payments and Insurance as well as, where available, other analytical evidence.

The IA highlighted that the assessed policy options would improve the application of deposit insurance across Member States and enhance legal certainty and depositor confidence. They would adequately adapt depositor protection to the recent evolutions and vulnerabilities of the financial ecosystem through specific provisions targeted towards cross-border activities, fintech services and anti-money laundering. They would also facilitate the use of DGS funds outside of the payout of covered deposits through a revised least cost test when such interventions ensure the access of depositors to their deposits in a more cost effective way.

However, by explicitly including certain types of depositors and deposits in the scope of coverage (public authorities, client funds) and further harmonising some rules (minimum level of coverage for temporary high balances, removal of the possibility to deduct liabilities of depositors that have fallen due from the repayable amount), these amendments could have an impact– albeit limited – on the costs for DGSs. Likewise, the changes to the least cost test for the use of DGS for interventions other than for payout could also have a financial impact on DGSs. These costs would be borne by the banking industry through contributions to the DGS and would not affect taxpayers in line with the principle of public money protection laid down in the DGSD.

The IA also confirmed that the EU DGS framework would be more resilient if backed by EDIS. Pooling funds into a shared scheme would strengthen the ability of the deposit insurance system in the Banking Union to cope with high-value payouts and enhance depositor confidence. Although the policy option to set up an EDIS is technically the most robust option, it is not politically feasible at this stage.

The Regulatory Scrutiny Board endorsed the impact assessment following a first negative opinion. To address the comments raised by the Board in relation to the DGS functioning, the impact assessment has been amended to better clarify the links between the EBA advice and the options set out in the IA.

• Regulatory fitness and simplification

The proposal should help to reduce the DGS’s regulatory and administrative burden by removing certain national options and discretions, applying equal treatment of third country branches and strengthening arrangements for cross-border cooperation between DGSs. By streamlining required disclosures and aligning them with what is necessary for the recipients, the amendments will alleviate the administrative work in implementing DGS requirements.

As regards digital readiness, the proposal builds on the technological and legal advancements to ensure that depositor information is easily accessible, and that the payout process is as swift as possible.

In addition, empowerments for the EBA will allow further adjustments to improve and harmonise even further the practical implementation of the DGSD provisions.

Costs for banks and national authorities would be very limited. Each of the depositor protection enhancements provided for under the DGSD proposal (temporary high balances, client funds, public authorities) is expected to have a very marginal impact on DGS funds. For instance, in 13 Member States, the amount of client funds constitutes less than 1% of all covered deposits in that Member State. The proposal will therefore preserve the competitiveness of the EU banking sector while boosting the protection offered to EU depositors. Moreover, the potential additional costs – albeit limited – arising from these improvements would be largely offset by the reduced costs for DGSs in performing their daily activities under the reviewed Directive. Indeed, by reducing the number of options, simplifying the mechanisms in place for cross-border cooperation and establishing at EU level a common methodology for least cost test completion, the proposal will free up DGS administrative resources.

Due to an increased role of DGSs in crisis management, the use of their financial means, which are collected from the banking sector, might require more frequent replenishments of their funds. However, in compliance with the least cost test, these measures are allowed only if they are considered as less costly for the DGS than a payout scenario. This approach safeguards its financial resources in the long term.

• Fundamental rights

The proposal respects the fundamental rights and observes the principles recognised by the Charter of Fundamental Rights of the EU, in particular the freedom to conduct a business (Article 16), the right to property (Article 17) and consumer protection (Article 38).

4. BUDGETARY IMPLICATIONS

The proposal has no impact on the EU budget. The proposal would require the EBA to develop seven technical standards and six guidelines in addition to those already present in the DGSD. Among these six new instructions for guidelines, three solely aim at codifying in level one text already existing guidelines (stress testing, delineation and reporting of available financial means, cooperation agreements), that were established on the EBA’s own initiative. Therefore, these guidelines would not require a significant additional burden of work. The other empowerments provided for under the proposal relate to various topics, covering both very targeted mandates (principle of diversification in low-risk assets) and broader topics (least cost definition).

Considering past and current work on crisis management at the EBA, it is considered that the proposed tasks for the EBA will not require additional positions and can be carried out with current resources.

The delivery of the technical standards is due 12 months after the entry into force of the Directive. This deadline should provide sufficient time for the EBA to develop them taking into account its current resources.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

Through regular interactions with the EBA Task Force on Deposit Guarantee Schemes, the Commission assesses the implementation of legal provisions³¹ and contributes to harmonise the level of depositor protection across the EU.

As already set out in existing DGSD, national authorities will keep reporting to EBA on the amount of available financial means, alternative funding arrangements and use of DGS funds, which EBA should in turn disclose. The proposal also maintains the periodic and follow-up reviews already foreseen in the original directive, for stress testing of DGSs, criteria for risk-based contributions and re-examination of coverage level.

• Detailed explanation of the specific provisions of the proposal

The proposed amendments build on and clarify the mandate of DGSs to better protect deposits in the context of the reimbursement of depositors. They also enhance the role of the DGS outside of situations in which depositors are repaid by the DGS following the failure of a bank for the purpose of bank crisis management with the view to maintain depositor confidence and financial stability. They finally set up specific requirements to simplify the daily activities of DGS and deal with administratively complex situations.

2. The proposal amends the following provisions of the DGSD:

Considering the enhanced possibilities for the use of DGS for financing preventive measures, transfer strategies in resolution and alternative measures in insolvency, Article 1 (‘Subject matter and scope’) is amended to clarify that along with the establishment and functioning of the DGS, the coverage and repayment of deposits, and the use of DGS funds for measures to maintain the access of depositors to their deposits also fall within the scope of this Directive. Paragraph 2, point (d) of this article is amended to clarify that branches of credit institution established in third countries are covered by the Directive.

Article 2 sets out terms and definitions that are used for the purpose of this Directive. It is amended to introduce definitions, consistently with the new provisions introduced in the proposal following the EBA’s recommendations in its opinions, in particular on clients’ funds deposits and anti-money laundering and terrorist financing.

Paragraph 8 of Article 4 is consolidated in the new Article 16a on exchange of information between credit institutions and DGS and reporting by authorities (see below).

In its opinion, the EBA pointed at the divergent implementation of the definition of public authorities. This led to a different scope of protection of deposits across Member States, which in some cases excluded from protection public entities such as schools, hospitals or municipal services, which are not sophisticated depositors. The existing differentiation between public authorities based on their budget and other characteristics creates operational difficulties for credit institutions and DGSs. Therefore, in Article 5, public authorities are no longer excluded from the scope of depositor protection with the objective of harmonising and enhancing their protection. The article also clarifies that deposits related to terrorist financing are excluded from the DGS protection.

Article 6, which regulates the coverage level of depositor protection, is amended to harmonise the minimum level of protection for temporary high balances, the related protection period and to clarify the scope of protected deposits held in view of real estate transactions.

Considering the divergent interpretations of the existing option related to the deduction from the repayable amount of liabilities of depositors that have fallen due, paragraph 5 of Article 7 is deleted to harmonise the rules for the calculation of the repayable amount. Paragraph 7 is amended to take into account situations where the interest rate is negative.

A new Article 7a on the burden of proof is introduced to clarify the procedural aspect of eligibility or entitlement to the deposits, leaving the burden of proof on depositors and account holders to prove that they are absolutely entitled to the deposits in beneficiary accounts or accounts with temporary high balances.

To give more time to verify the eligibility for repayment and in line with the provision on the burden of proof laid down in Article 7a, Article 8 is amended to allow the DGS to apply a longer period of up to 20 working days in the case of repayment of beneficiary accounts, client funds, and temporary high balances. The cut-off date starts being counted from the date on which a DGS received the complete documentation allowing the examination of claims and verification of conditions for repayment. The amended article also allows the DGS to set a threshold for the repayment of dormant accounts.

A new Article 8a is inserted to ensure that depositors, above a threshold of Euro 10 000, are reimbursed via credit transfers in line with the AML/CFT objectives.

Financial institutions such as investment firms, payment or e-money institutions collect funds from their clients and are required by the sectoral rules to safeguard those funds, including inter alia via placing them on segregated accounts with credit institutions. A new Article 8b sets out rules to harmonise the scope of deposit protection for such funds deposited on behalf and for the account of their clients, for the purpose of segregation. The article also details the modalities for the repayment of the account holder or the client and mandates the EBA to develop draft regulatory technical standards for the identification of clients in such cases.

The Commission’s proposal for a regulation on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing ³² requires that financial supervisors cooperate with resolution authorities or designated authorities and inform those authorities of the outcome of customer due diligence measures. A new Article 8c DGSD is introduced in order to avoid the repayment of deposits where the outcome of customer due diligence reveals that there is a suspicion of money laundering or terrorist financing, as well as to ensure a smooth exchange of information between the designated authority and the DGS in these cases. This new provision also establishes withholding arrangements on DGS repayments for payouts of covered deposits entailing money laundering / terrorism financing concerns.

Article 9 DGSD provides that where a DGS makes payments in the context of resolution proceedings, the DGS should have a claim against the relevant credit institution for an amount equal to its payments. That claim should rank pari passu with covered deposits. This provision does not make a distinction between DGS contribution to an open-bank bail-in resolution (where the bank’s entity is preserved and continues its operations) and DGS contributions to the financing of a transfer strategy (sale of business or bridge institution tool and liquidation of the residual entity). The absence of such a distinction may create uncertainty with respect to the existence and the amount of a DGS claim in different scenarios. Therefore, Article 9 is amended to specify that, when DGS funds are used in the context of transfer strategies in resolution or alternative measures in insolvency proceedings, the DGS should have a claim against the residual institution or entity in its subsequent winding-up proceedings under national law. This is justified by the fact that the DGS funds are used in connection to losses that would have otherwise been borne by depositors. This claim should rank at the same level as deposits under national insolvency rules to ensure that the shareholders and creditors left behind in the residual institution or entity effectively absorb the losses of the institution and to improve the possibility of DGS recoveries in insolvency. On the contrary, a DGS contribution to an open-bank bail-in resolution in lieu of covered deposits for the amount by which covered deposits would have been written down or converted, had they been subject to bail-in, should not generate a claim against the institution under resolution, as it would eliminate the purpose of the DGS’s contribution.

Article 9, paragraph 3 is amended to harmonise to five years the period during which depositors can make a claim against the DGS.

Article 10 is amended to specify the reference period for the calculation of the target level and the fact that only money directly contributed to the DGS or recovered by the DGS are eligible to fulfil the target level. This clarification is in line with the current rules applicable by virtue of the EBA’s guidelines. The objective is to clarify that money collected via loans is not eligible to reach the target level.

Paragraph 4 of Article 10 is deleted as the option to raise the available financial means through the mandatory contributions paid by member institutions to existing schemes of mandatory contributions established by a Member State has not been used in practice.

In line with the EBA opinions, to improve convergence of practices and ensure that funds could be made available to meet the deadline to reimburse depositors, a new paragraph 11 is added to Article 10, providing for flexibility for DGSs to use alternative funding arrangements financed through private sources before using the available financial means and funds collected through extraordinary contributions. Furthermore, such flexibility would allow DGSs to avoid having to immediately raise extraordinary contributions, where raising such contributions would endanger financial stability (e.g. in a systemic crisis). Full flexibility is also needed to enable DGSs to use their funds in the most efficient way and avoid a fire sale of their assets (available financial means) at the point of crisis. At the same time, the provision ensures that funding from public sources could be used only as a last resort.

Additionally, the new paragraph in Article 10 clarifies requirements to ensure the sound management of DGS funds and mandates the EBA to develop guidelines on the diversification of DGS’ investment strategy. It also provides for the possibility to place DGS funds in a segregated account at the national central bank or national Treasury. Furthermore, it mandates the EBA to develop regulatory technical standards on the delineation of available financial means for DGSs.

Article 11 is amended to clarify the distinction between preventive and alternative measures. Preventive measures are DGS interventions supporting financially a bank in distress, for example in the form of guarantees, cash injections, participation in capital increase, before the bank meets the conditions for failing or likely to fail with the objective to preserve its financial soundness. Alternative measures are DGS interventions supporting the transfer of deposits and assets of the failing bank to another bank (e.g., in the form of a cash contribution to fill the gap between assets and deposits, guarantees) in the context of insolvency to preserve the access of depositors to their money.

Article 11a establishes a set of safeguards for preventive measures and allocate the responsibilities among authorities for assessing how preventive measures are applied. This aims at ensuring that the use of these measures is timely, cost-effective and applied consistently across Member States, as improvements to the current situation.

Article 11b provides for the conditions underlying the note with measures that a credit institution commits to undertake to ensure or restore compliance with prudential requirements. Such note of measures should be consulted with the competent authority.

Article 11c establishes requirements for the credit institutions which did not comply with their commitments or fail to repay financial support granted with preventive measures. The EBA is mandated to develop guidelines on the content of the note with measures needed for the efficient implementation of a preventive measure and of the remediation plan.

When using DGS funds for the purpose of alternative measures referred to in Article 11(5), Article 11d provides for the conditions for marketing of the bank’s assets, rights and liabilities. This process should be harmonised in order to limit adverse impacts on competition and to facilitate attracting potential buyers. This should also ensure consistency with the transfer tools under the BRRD. In line with the BRRD, the procedures to wind up the residual entity in an orderly manner should be initiated without delay.

A least cost test compares the cost of a DGS intervention to prevent the further deterioration of a bank’s financial situation or the DGS cost for the transfer of business to another bank with the cost of a hypothetical scenario of a payout of covered deposits in liquidation. This requirement has been implemented differently across Member States. A new Article 11e clarifies and harmonises the approach to perform the least cost test, which determines the maximum amount a DGS may contribute outside payout, to finance preventive, resolution and alternative measures. A payout of covered deposits in insolvency can generate direct and indirect costs for the DGS and its members. Direct costs correspond to the amount disbursed by the DGS for its payout minus the recoveries from the liquidation proceedings. Indirect costs should take into account the replenishment of the funds spent by the DGS and the additional costs of funding for the DGS linked to the payout. When the least cost test is performed for the purpose of preventive measures, the importance of such measures for the DGS statutory or contractual mandate should also be factored in the calculation of the payout counterfactual. The cost of interventions outside payout should take into account expected earnings, operational expenses and potential losses related to the intervention. The EBA is mandated to develop draft regulatory technical standards specifying the methodology for the least cost test calculation.

Article 14 is amended to clarify that the protection by DGSs also covers depositors located in Member States where their member credit institutions exercise the freedom to provide services. It sets the conditions to give a DGS in a home Member State the possibility to reimburse directly depositors of branches established in another Member State and to allow a DGS in a host Member State to operate as a point of contact for depositors of credit institutions that exercise the freedom to provide services. The EBA is mandated to develop guidelines on the respective roles of home and host DGSs and on the circumstances and conditions under which a DGS in a home Member State should decide to reimburse depositors of branches located in another Member State. Furthermore, it specifies the rules applicable to the calculation of funds to be transferred when a member institution changes its DGS affiliation from one Member State to another.

Article 15 is amended to require that branches of credit institutions established in third countries join a DGS in a Member State if they want to provide banking services and take eligible deposits in the EU. According to the EBA opinion, the vast majority of third country branches in EU Member States are already members of an EU DGS, either because the third country depositor protection regime is deemed to be non-equivalent or no formal equivalence assessment has been made. Some of the remaining branches were not required to join a respective EU DGS notwithstanding the results of the equivalence assessment showing their depositor protection was not equivalent. In line with the EBA recommendation, this amendment includes this membership requirement and ensures equal protection for depositors in the EU branches of third country banks and in EU banks and their branches in different Member States. This enhances the protection of depositors as it eliminates the risk of having deposits in the EU whose protection by a non-EU DGS would not be up to the EU standards (according to the EBA opinion, among the 74 non-EEA branches in the EU, 5 were not members of an EU DGS). Requiring EU branches of third country banks to join an EU DGS is also in line with one of the main objectives of this review to facilitate the use DGS funds in resolution.

In order to avoid that DGS funds are exposed to economic and financial risks in third countries, a new Article 15a allows DGS coverage of depositors belonging to branches of member institutions located in third countries only if the collected funds are above the minimum target level.

Article 16 is amended to harmonise information which banks have to provide to their clients annually on the protection of their deposits. It also enhances the information requirements for depositors in case of mergers or other major reorganisations of credit institutions, changes of DGS affiliation and unavailability of deposits due to the critical financial situation of banks. Member States are empowered to verify the appropriateness of the information provided to depositors and the EBA is empowered to develop draft regulatory standards for the format and the content of the information sheet and the procedures and the information to depositors, also with reference to client funds deposits and to terrorist financing/money laundering situations.

A new Article 16a is introduced to clarify the rules on reporting and improve the exchange of information from the credit institution to the DGSs and from the DGSs and the designated authorities to the EBA. It is important that the DGS receives from its affiliated institutions at any time and upon request information on deposits it insures. This is necessary for the DGS to operate as requested by this Directive in an effective way. These reporting requirements are derived from existing obligations by banks to ensure immediate identification of deposits or follow from the expansion of depositor protection and therefore, do not contradict the overall objective of reducing the administrative burden on credit institutions. Furthermore, it is important that the EBA is appropriately informed of situations that occur and for which the DGS may intervene in accordance with this Directive, to support the EBA in its tasks of overseeing the financial integrity, stability, and security of the European banking system. The EBA will be empowered to develop draft implementing technical standards on the template, the procedures and the content of this information.

Member States have to transpose these amendments within two years after the entry into force of the amending Directive. The new rules regarding the application of safeguards on the use of preventive measures by DGSs under Article 11a require organisational changes and gradual building up of operational capacities by DGSs and designated authorities which justify a longer implementation period. Taking into account the specificities of IPSs which are recognised as DGS, this implementation period may be extended further.

Please note

Contents

1.

The DGSD proposal covers a range of policy aspects and constitutes a coherent response to the identified problems. It therefore aims to:

2.

The proposal amends the following provisions of the DGSD: