On 12 June 2014, Directive 2014/49/EU on deposit guarantee schemes (the “DGS Directive“) was published in the Official Journal of the European Union. It forms part of the measures adopted in the aftermath of the financial crisis in an effort to establish a banking union and aims to further strengthen the protection of depositors. This simplification and harmonisation will contribute to more transparency for depositors, faster verification of claims by the deposit guarantee schemes (“DGSs”) and speedier reimbursement in the event of a bank failure. The main changes brought by the DGS Directive to the existing system resulting from the original Directive on Deposit Guarantee Schemes 94/19/EC (the “1994 Directive”) and the Directive of March 2009 (the “2009 Directive”), amending certain key elements (i.e. coverage level, pay-out delay, deletion of the co-insurance system) of the 1994 Directive are summarised herein.
DGSs may be defined as schemes funded by credit institutions which aim to guarantee, up to a certain level, the repayment of deposits from account holders in the event of failure of one of its members.
The DGS Directive broadens the scope of protected depositors to any enterprises whatever their size. The 1994 Directive indeed provided an option for Member States to exclude large enterprises, which Luxembourg had chosen to implement.
The DGS Directive applies to cash deposits only and not to the investors-compensation scheme. A proposal to amend the Directive 97/9/EC on investor-compensation schemes (which included the same possibility to exclude large enterprises) was submitted in 2010 but has not yet been adopted. This proposal also suggests including all enterprises whatever their size within the scope of protected investors.
The DGS Directive confirms that €100,000 is an appropriate level of protection in case of bankruptcy and that deposits are covered per depositor per bank. This means that the limit of €100,000 applies to all aggregated accounts at the same bank. If a bank operates under different brand names, the coverage level applies to the aggregated amount of all deposits of the same depositor held at this bank. Depositors must be informed that deposits held under different brand names of the same bank are not covered separately. However, deposits by the same depositor in different banks all benefit from separate protection. This extension from a limit of €20,000 to a limit of €100,000 had been anticipated by the Luxembourg legislator in 2008.
2. Payment conditions and timeframe
In addition, access to the guaranteed amount will be easier and faster. At least 70 % of this payment must be made in cash and repayment deadlines will be gradually reduced from the current 20 working days to 7 working days in 2024. The measures set by the DGS Directive ensure that this faster pay-out will be achieved in practice: DGSs will be informed at an early stage by supervisory authorities if a bank failure becomes likely. The DGS will have prompt access to information on deposits at any time. Banks will be required to tag eligible deposits, provide single customer views, and maintain their records up to date. The verification of claims is simplified by abandoning time-consuming set-off procedures, although Member States may decide that due liabilities of the depositor to the bank are taken into account for calculation of the amount to be repaid by the DGS. If a bank fails, no application from depositors will be needed: the DGS will pay on its own initiative.
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.
3. Depositors’ information
The DGS Directive improves depositors’ information to ensure that depositors are aware of the key aspects of protection of their deposits by the DGS. When entering into a deposit agreement with a bank, depositors will countersign a standardised information sheet containing all relevant information about the coverage of the deposit by the competent DGS. The updated standardised information sheet will be sent by banks to their customers at least once a year. Prospective depositors should be provided with the same information by way of a standardised information sheet, of which they should acknowledge receipt. In addition, banks will be required to inform their depositors about the DGS protection of their deposits on the statements of account.
4. Ex-ante financing
For the first time since the introduction of DGSs in 1994, the DGS Directive sets out financing requirements for the schemes in three steps. In principle, the first step consists of an ex-ante financing: the banks are required to make biannual contributions to their deposit guarantee scheme. If the ex-ante financing is insufficient to repay depositors in the event 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. If these additional contributions are not sufficient, the scheme would have access to alternative funding arrangements and would also have the right to borrow from all other DGSs within the European Union under certain conditions.
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.
5. Implementation deadline
The DGS Directive should, for the most part, be implemented and effective from 3 July 2015.