European Commission Financial Services: Commission Proposes Self-Regulatory Improvements To Deposit Guarantee Schemes

The European Commission has set out, in the form of a Communication, its approach to modernising current EU legislation on deposit guarantee schemes, which provide consumers with a safety net so that, if a bank fails, they will be able to recover at least €20,000 of their deposits. The Commission has concluded that while the current rules are sufficient for the time being, a number of self-regulatory steps could be taken to improve how schemes work cross-border within the EU. A more fundamental overhaul is considered premature at this stage, while any decision about further convergence of national rules and practices is tied to broader discussions on crisis management.

Internal Market and Services Commissioner Charlie McCreevy said: "Deposit guarantee schemes are crucial to the EU's financial stability. But the different ways they work at national level can make fast and efficient crisis management difficult. We are proposing that the banking industry address some of these issues itself, without the need for new legislation – another example of better regulation in practice. However, we do not rule out a fundamental legislative overhaul at some point in the future if it proves necessary."

The Deposit Guarantee Schemes (DGS) Directive (94/19/EC) obliges all Member States to set up compensation schemes for depositors. However, some Member States have introduced guarantee thresholds higher than the minimum €20,000, and how the schemes function in practice is also not uniform across the EU. The Communication examines how this situation, combined with increased competition and integration in the EU banking market, affects the functioning of the current rules.

Based on the results of a consultation launched in 2005 (see IP/05/930), the Communication proposes a number of improvements that the EU banking industry could introduce by 'self-regulatory' means, including: fine tuning "topping up" arrangements (where a bank branch in another Member State voluntarily joins the host country's deposit guarantee system); shortening the time it takes for schemes to pay out to depositors after a bank failure; and improving exchange of information between schemes.

The Communication also concludes that there is currently no case for changing the current minimum guarantee level of €20,000. Research carried out by the Commission's Joint Research Centre (JRC) has provided evidence that the differences in deposit levels held by depositors across EU Member States remain too large - especially since the 2004 EU enlargement.

In addition, discussions are currently underway in a number of different forums about the efficiency of current supervisory arrangements. As DGS constitute an important component of the supervisory safety net intended to mitigate the effect of cross-border banking crises, further clarity is needed in particular on the question of the overall division of supervisory responsibilities and financial liabilities in crisis situations, before it can be decided whether more fundamental changes to the existing DGS arrangements might prove necessary. One core element of any such revision would be the harmonisation of the financing mechanisms of DGS. As a further recent report from the JRC has revealed that six Member States would face costs in the region of €2.5 to €4.3 billion in order to build up funds in their systems, further assessment will be necessary in order to substantiate whether change is needed.
The Communication is available at:

http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm