EN

(...PICT...)|EUROPEAN COMMISSION|

Brussels, 12.7.2010

SEC(2010) 834 final

COMMISSION STAFF WORKING DOCUMENT

IMPACT ASSESSMENT Accompanying document to the Proposal for a DIRECTIVE …/…/EU OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Deposit Guarantee Schemes [recast] and to the REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND TO THE COUNCIL Review of Directive 94/19/EC on Deposit Guarantee Schemes COM(2010) 368 COM(2010) 369 SEC(2010) 835

TABLE OF CONTENTS

1. INTRODUCTION 5

2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 6

3. POLICY CONTEXT AND SCOPE OF THE IMPACT ASSESSMENT 7

3.1. Policy context 7

3.2. Scope of the impact assessment 8

4. PROBLEM DEFINITION 9

4.1. Differences in the level and scope of coverage of DGS 9

4.2. Inadequate payout procedures 16

4.3. Insufficient depositor information 18

4.4. Inappropriate financing of DGS 19

4.5. Limited mandates of DGS 21

4.6. Fragmentation and limited cross-border cooperation between DGS 22

4.7. Exemption of mutual and voluntary guarantee schemes from the DGS Directive 23

4.8. Baseline scenario 24

5. SUBSIDIARITY 27

6. OBJECTIVES 27

7. POLICY OPTIONS: IMPACT AND COMPARISON 30

7.1. Level of coverage 31

7.2. Exemptio n s from the coverage level 34

7.3. Scope of coverage: eligibility of depositors 37

7.4. Scope of coverage: protected products 39

7.5. Payout delay an d modalities 42

7.6. Capability of DGS to deal with payout situations 48

7.7. Depositor information 50

7.8. Funding mechanisms and levels 52

7.9. Bank contributions to DGS 59

7.10. Mandate of DGS 64

7.11. Cross-border cooperation of DGS and a pan-EU DGS 67

7.12. Other issues 70

8. OVERALL IMPACT OF THE PREFERRED POLICY OPTIONS 71

8.1. Micro- and macroeconomic impacts of the preferred policy options 71

8.2. Social impact 78

8.3. Administrative burden 78

9. MONITORING AND EVALUATION 79

LIST OF ANNEXES

ANNEX A: Comparison of the Commission proposal with the final text of Directive 2009/14/EC 80

ANNEX B: Inclusions in the scope of coverage applied in Member States 81

ANNEX C: Differences between DGS and other financial protection schemes 82

ANNEX D: DGS mandates broader than 'payboxes' in Member States 83

ANNEX E: Comparison of selected provisions of Directives DGS (94/19/EC) and CRD (2006/48/EC) 84

ANNEX F: Topping up 85

ANNEX G: Mutual and voluntary guarantee schemes 87

ANNEX H: Additional issues raised by stakeholders 91

ANNEX J: Preferred options (summary) 92

ANNEX K: Costs analysis: impact on DGS and member banks (summary) 94

LIST OF STATISTICAL ANNEXES

Statistical annexes: sources, definitions and methodologies 97

ANNEX 1: Coverage levels in EU Member States and EEA countries before and after the aggravation of the financial crisis (as of 30 October 2009) 100

ANNEX 2: Data on the amount and number of deposits in Member States (as of 31 December 2007) 103

ANNEX 3: Potential impact of the harmonised coverage levels in terms of deposit protection 104

ANNEX 4: Potential impact of the harmonised coverage levels on bank contributions to DGS 106

ANNEX 5: Potential impact of the harmonised coverage levels on operating profits of banks 107

ANNEX 6: Potential impact of the harmonised coverage levels on depositors 108

ANNEX 7: Average deposits held by households in Member States 109

ANNEX 8: Selected data on house prices in Member States 110

ANNEX 9: Potential exemptions from the fixed level of coverage – temporary high deposit balances 111

ANNEX 10: Selected data on deposits and depositors in the EU (incl. enterprises) 114

ANNEX 11: Potential impact of the inclusion or exclusion of some depositors into/from the scope of coverage 116

ANNEX 12: Selected data relating to the payout process in the EU 118

ANNEX 13: DGS funds and contributions to DGS 121

ANNEX 14: Potential total costs of setting a target level for DGS under various scenarios 125

ANNEX 15: Number of Member States able to handle the costs under various scenarios on a target level for DGS 129

ANNEX 16: Current capability of DGS to cope with a bank failure of a certain size (using ex-ante funds, contributions and additional contributions available under the current regime) 130

ANNEX 17: Current capability of DGS to cope with a bank failure of a certain size (using ex-ante and additional contributions available under the current regime) 131

ANNEX 18: Harmonized scenarios on DGS funding: potential impact on total DGS funds and bank contributions 133

ANNEX 19: Harmonized scenarios on DGS funding: potential impact on banks – variation in bank operating profits 136

ANNEX 20: Harmonized scenarios on DGS funding: potential impact on depositors 137

ANNEX 21: Potential cumulative impact on banks and depositors during the first 5 years: harmonized scenario on payout, funding and scope/level ofcoverage 139

ANNEX 22: Potential cumulative impact of various harmonised scenarios on banks 141

ANNEX 23: Results for the harmonized scenario on borrowing by DGS 142

ANNEX 24: Estimated administrative costs if the de-minimis rule is applied 143

ANNEX 25: Potential models for calculating risk-based contributions 144

ANNEX 26: Funds invested by ex-ante DGS 146

ANNEX 27: Permanent, temporary and additional workforce of DGS 147

ANNEX 28: Potential structure of a pan-EU DGS 148

ANNEX 29: Mutual borrowing of DGS – maximum amount to be lent by DGS to face potential failures 149

ANNEX 30: Historical database of DGS interventions 150

This document commits only the Commission services involved in its preparation and does not prejudge the final form of any decision to be taken by the Commission

1. INTRODUCTION

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.

Since 1994, Directive 94/19/EC on Deposit Guarantee Schemes OJ L 135, 31.5.1994. (DGS) has ensured that all EU Member States have in place a safety net for depositors if banks fail to pay. First and foremost, bank failures are prevented by the prudential supervision ensured by national supervisory authorities and harmonised throughout the EU to a relatively high extent. If nevertheless a bank has to be closed, its DGS steps in and reimburses depositors up to a certain ceiling (i.e. the coverage level), thereby financing depositors' needs. The existence of DGS also means that most depositors (those who are fully covered) do not have to participate in lengthy insolvency procedures which usually lead to insolvency dividends representing only a fraction of the original claims.[1]

OJ L 135, 31.5.1994.

The events in 2007 and 2008 have shown that the existing fragmented system of DGS has not delivered on the objectives set by the Directive in terms of ensuring depositor confidence and maintaining financial stability in times of economic stress. The Commission has therefore been requested to comprehensively review Directive 94/19/EC. This impact assessment aims at providing for an evidence-based analysis of the existing and potential problems stemming from the current guarantee system, spells out possible policy options designed to address the problems in line with the objectives set, shows the possible impacts of the policy options and tests these options against the effectiveness, efficiency and consistency criteria.

The Commission work on DGS is part of a package on guarantee schemes in the financial sector consisting of DGS, insurance guarantee schemes (IGS) and investor compensation schemes (ICS). The main objective of IGS is the protection of policyholders in the event of an insurance company failure. The main purpose of ICS is to compensate investors if a firm fails and is unable to repay money in connection with investment services or if it is unable to return a financial instrument to its client. Such a claim typically arises if there is fraud or theft. However, a decline in the value of an investment (market risk) is not covered by any scheme. More details about the commonalities and differences between these schemes are set out in Annex C.

The revision of the Directive on Deposit Guarantee Schemes will be only one among numerous ongoing initiatives to enhance financial stability (e.g. the revisions of the Capital requirements Directive 2006/48/EC and ongoing work on crisis management and bank resolution).

2. PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES

This impact assessment accompanies both the legislative proposal and the report fulfilling the Commission's obligations under Article 12 of Directive 2009/14/EC that entered into force on 16 March 2009 OJ L 68, 13.3.2009 . . The Directorate-General Internal Market and Services (DG MARKT) has been in the lead (items 74 and 76 on its work programme). Sections 4.1.1 , 4.4.2 , 4.5 , 4.6 , 7.9 , 7.10 and 7.12 relate to the report and all other chapters concern the legislative proposal.[2]

OJ L 68, 13.3.2009 .

The Inter-Service Steering Group included the following Directorates-General: Secretariat General, Legal Service, Economic and Financial Affairs, Employment and Social Affairs, Health and Consumers, Competition, Enterprise and Industry, Taxation and Customs Union, and the Joint Research Centre (JRC) . The group met in February, April, May, July, September, November 2009 and January 2010. The minutes of the last meeting have been transmitted to the IA Board. The European Central Bank was also consulted in the course of preparation of the IA report. The JRC gathered numerical and statistical information for the IA report In principle, the JRC calculations are based on the data from all Member States (if the data from some Member States are unavailable, the calculations are based on the remaining Member States). . All figures are quoted from a draft JRC report unless indicated otherwise The final JRC report will be published in spring 2010. . [3][4]

In principle, the JRC calculations are based on the data from all Member States (if the data from some Member States are unavailable, the calculations are based on the remaining Member States).

The final JRC report will be published in spring 2010.

External expertise was used to prepare this proposal. In March 2009, an informal roundtable with experts was held For more details, see http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm . . Member States' expertise was provided at the three meetings of the Working Group on Deposit Guarantee Schemes (DGSWG) – in June and November 2009 and February 2010. In the context of the Commission Communication of 2006 on the review of the DGS Directive, the JRC was asked to submit reports on the coverage level (2005), the possible harmonisation of funding mechanisms (2006 and 2007), the efficiency of deposit guarantee schemes (2008) and the possible models for introducing risk-based contributions in the EU (2008 and 2009) Ibid. . This work was supported by the European Forum of Deposit Insurers (EFDI), which in 2008 also finalised several reports on specific issues The relevant reports issued by EFDI in May 2008 are all available at www.efdi.eu . . This work has been taken into account for the current proposal.[5][6][7]

For more details, see http://ec.europa.eu/internal_market/bank/guarantee/index_en.htm .

Ibid.

The relevant reports issued by EFDI in May 2008 are all available at www.efdi.eu .

A public consultation was held from 29 May to 27 July 2009. All 104 contributions and a summary report have been published in August 2009 See http://ec.europa.eu/internal_market/consultations/2009/deposit_guarantee_schemes_en.htm . and stakeholders' views have been taken into account in this impact assessment.[8]

See http://ec.europa.eu/internal_market/consultations/2009/deposit_guarantee_schemes_en.htm .

This impact assessment was presented to the Impact Assessment Board on 24 March 2010. In its opinion issued after the meeting, the Board assessed that "the report [i.e. this impact assessment] presents a large amount of analysis in a clear manner" and "quantitative estimates are provided for most impacts" . Moreover, as stated by the Board, "the report largely respects the standards set out in the IA guidelines and presents complex issues in understandable language" . At the same time, the Board made some recommendations for improvement. They were related to (i) strengthening the evidence and the arguments underpinning the problems with the current level of harmonisation; (ii) providing a stronger justification for the preferred options; (iii) assessing the size of the most relevant impacts and the possibility of mitigating measures for individual stakeholders; and (iv) integrating more transparently the results of the public consultation. These recommendations were taken into account in the following way:

The evidence base has been further strengthened given the scale of the suggested policy changes and the cost implications (see in particular 7.8). Several quantitative annexes have been added. A more extensive analysis of the problems with the current level of harmonisation has been provided (see in particular 4.1). The subsidiarity and proportionality of the suggested increase in harmonisation and the phasing-out of national DGS features offering higher coverage has been assessed in greater depth (see 5.). The report has also provided a stronger justification for specific parameters, notably the nominal coverage level (see 7.1), the preference for a single payout within a short delay (see 7.5), the split between ex-ante and ex-post financing and the target level for funds at DGS disposal (see 7.8). The report has indicated clearly (where appropriate) where these will be particularly relevant for certain Member States or stakeholders. Finally, the results of the public consultation have been visibly and transparently integrated into the analysis (see in particular Chapter 7). Some annexes were added in order to accommodate the comments of the Board.

3. POLICY CONTEXT AND SCOPE OF THE IMPACT ASSESSMENT

3.1. Policy context

The Council of the European Union agreed on 7 October 2008 that it was a priority 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 DGS. The Council also agreed 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 €50 000, acknowledging that many Member States determined to raise their minimum to at least €100 000.

Following that, on 15 October 2008, the Commission adopted a proposal to amend the DGS Directive. It underwent some changes during the legislative proceedings and the final text was published on 13 March 2009 (see Annex A).

There was general agreement between the Council, the European Parliament and the Commission that those amendments could only be an emergency quick-fix measure when the crisis aggravated in order to restore and maintain the confidence of depositors. The need for swift negotiations (adoption by the European Parliament within two months) would not have allowed a satisfactory response to all open issues. This is why the amendments include a broad review clause on all aspects of DGS.

The need to reinforce DGS by appropriate legislative proposals has been reiterated in the Commission Communication of 4 March 2009 on 'Driving European recovery' COM(2009)114, p. 4. and is part of the political guidelines of President Barroso of 3 September 2009.[9]

COM(2009)114, p. 4.

In its Communication of 20 October 2009 COM(2009)561. , the Commission consulted on the tools that are considered necessary for an EU crisis management framework. These tools range from 'early intervention' actions by banking supervisors aimed at correcting irregularities at banks, to bank resolution measures which involve the reorganisation of ailing banks, to insolvency frameworks under which failed banks are wound up. The current review of DGS should be seen in this context as well since DGS are only triggered if a bank cannot be saved by other measures. The better the crisis management tools are, the lower the probability that DGS are triggered. Moreover, a discussion of crisis management also raises the question to which extent DGS should be actively involved in it provided that they are soundly financed, which will be dealt with in section 7.10 of this report and in forthcoming initiatives on crisis management.[10]

COM(2009)561.

3.2. Scope of the impact assessment

This impact assessment is a basis for both the report to the European Parliament and the Council and for the legislative proposal to amend Directive 94/19/EC. It covers the following issues which are determined by the review clause of Article 12(1) of the Directive:

“(a) the harmonisation of the funding mechanisms of deposit-guarantee schemes addressing, in particular, the effects of an absence of harmonisation in the event of a cross-border crisis, in regard to the availability of the compensation payouts of the deposit and in regard to fair competition, and the benefits and costs of such harmonisation;

(b) the appropriateness and modalities of providing for full coverage for certain temporarily increased account balances;

(c) possible models for introducing risk-based contributions;

(d) the benefits and costs of a possible introduction of a Community deposit-guarantee scheme;

(e) the impact of diverging legislations as regards set-off, where a depositor’s credit is balanced against its debts, on the efficiency of the system and on possible distortions, taking into account cross-border winding-up;

(f) the harmonisation of the scope of products and depositors covered, including the specific needs of small and medium enterprises and local authorities;

(g) the link between deposit-guarantee schemes and alternative means for reimbursing depositors, such as emergency payout mechanisms.

If necessary, the Commission shall put forward appropriate proposals to amend this Directive.”

Furthermore, Article 10(1) of Directive 2009/14/EC sets out that:

“by 16 March 2011, the Commission shall submit to the European Parliament and to the Council a report on the effectiveness and delays of the payout procedures assessing whether reduction to 10 working days of the delay referred to in the first subparagraph could be implemented.”

Article 7 of Directive 2009/14/EC required Member States to increase the coverage level to at least €50 000 by the end of June 2009 and obliged them to implement the coverage level of €100 000 by the end of 2010. This level will be fixed, i.e. in general DGS will not be permitted to offer higher or lower coverage.

The Commission has been tasked to assess retroactively whether this increase is appropriate and whether it is viable for Member States. In this context, it has to be borne in mind that DGS are financed by banks and the Commission intends to maintain this requirement. That means that the budget of Member States is not directly concerned by the DGS Directive. The recent crisis has shown that in a systemic crisis, DGS may reach their limits. However, even if in such cases governments stepped in under strict obedience of state aid rules, this would not be triggered under a legal obligation in the DGS Directive and 'viability for Member States' is therefore not subject of this impact assessment However, since the fiscal support measures for banks in the financial crisis, in particular the recapitalisation measures (expressed as a percentage of eligible deposits) were by far more expensive than the measures proposed here, it can be concluded that the increase in coverage level introduced by Directive 2009/14/EC would be viable even if governments were forced to repay depositors. . [11]

However, since the fiscal support measures for banks in the financial crisis, in particular the recapitalisation measures (expressed as a percentage of eligible deposits) were by far more expensive than the measures proposed here, it can be concluded that the increase in coverage level introduced by Directive 2009/14/EC would be viable even if governments were forced to repay depositors.

4. PROBLEM DEFINITION

Currently, there are 39 DGS in 27 Member States. They are very different as regards the number of member banks (ranging between 6 and 1209 in 2008), their human and financial resources (between 0 and 168 persons of permanent staff – see Annex 27), their administrative setup (16 schemes are private, 13 schemes are public, 10 schemes are characterised by both public and private elements) and the available ex-ante financial resources (between €0 and €6.5 billion in 2007 – see, for example, Annex 13). In some Member States, notably in DE and AT, there are also mutual and voluntary guarantee schemes, which reinforce or replace statutory DGS subject to the Directive.

The problems inherent to this fragmentation of DGS are spelled out below and summarised in a 'problem tree' at the end of this chapter.

4.1. Differences in the level and scope of coverage of DGS

4.1.1. Diverging and inappropriate level of coverage

The approach of minimum harmonisation, introduced by the Directive 94/19/EC, has resulted in significant differences between the coverage levels in the EU. They currently range from the minimum of €50 000 in nine Member States to €103 291 in IT In Norway (EEA country), the coverage level is equivalent to over €240 000. (see Annex 1 for more details). The coverage ratios, i.e. the ratios between available DGS funds and eligible deposits, are also very different throughout the EU (see Annex 16).When the financial crisis aggravated in autumn 2008, most Member States either raised their coverage levels to €50 000 or €100 000 or issued unlimited guarantees, sometimes covering not only deposits but all liabilities of banks. First, on 20 September 2008, the Irish government announced its commitment to provide increased coverage of €100 000 for Irish banks but for a few days excluding subsidiaries of foreign banks. Moreover, the government law of 30 September 2008 gave temporary unlimited state guarantees for major Irish banks. As a result, depositors quickly shifted money to banks covered by higher or unlimited guarantees, notably from UK to IE http://www.breakingnews.ie/ireland/savers-shifting-cash-to-irish-banks-379909.html ; http://www.guardian.co.uk/politics/2008/oct/02/alistairdarling.ireland . . This created heavy liquidity strains to the banks not covered by such guarantees. In this situation, in early October 2008, the UK authorities were forced to raise the coverage level from £ 35 000 to £ 50 000. In order to avoid competitive disadvantages and prevent the outflow of deposits, o ther Member States were also forced to increase radically their coverage (for example, in early October 2008, AT adopted law on temporary unlimited coverage for individuals, and the governments in GR and DE also declared unlimited deposit guarantees but they were not followed by any legislative action). Those actions were undertaken unilaterally in an uncoordinated way, and – as they were followed by other Member States – contributed to serious competitive distortion between Member States, undermining depositor confidence and threatening the overall stability of the EU financial markets. In order to maintain depositor confidence and prevent runs on banks, the ECOFIN Council had to intervene urgently The ECOFIN Council agreed on 7 October 2008 that all Member States would, for an initial period of at least one year, provide deposit protection for individuals for at least € 50 000, acknowledging that many Member States had already determined to raise their minimum to at least € 100 000. The ECOFIN Council also welcomed the intention of the Commission to bring forward urgently an appropriate proposal to promote convergence of DGS. . [12][13][14]

In Norway (EEA country), the coverage level is equivalent to over €240 000.

http://www.breakingnews.ie/ireland/savers-shifting-cash-to-irish-banks-379909.html ; http://www.guardian.co.uk/politics/2008/oct/02/alistairdarling.ireland .

The ECOFIN Council agreed on 7 October 2008 that all Member States would, for an initial period of at least one year, provide deposit protection for individuals for at least € 50 000, acknowledging that many Member States had already determined to raise their minimum to at least € 100 000. The ECOFIN Council also welcomed the intention of the Commission to bring forward urgently an appropriate proposal to promote convergence of DGS.

Therefore, the above experience confirms two aspects:

- the approach of minimum harmonisation as to coverage levels lead to unwanted side-effects and seriously jeopardised financial stability, and, on the other hand

- the level of coverage as stipulated by Directive 94/19 (minimum €20 000) was too low .

This current level of coverage is insufficient since even before the crisis (in 2007), the average household deposits amounted to more than €50 000 in at least five Member States and were only slightly below this amount in two other Member States (see Annex 7). In particular, the coverage level of €50 000 is inappropriate for the old Member States (EU-15). The average size of household deposits in the EU-15 was about €41 400 as of end-2007. Assuming similar deposit growth rates as in the previous years (about 5% per year), one could expect an average deposit in those Member States of roughly €53 000 or €58 000 within the next 3-5 years respectively. The events have also shown that there is a lack of cooperation between Member States, which is aggravated by the fragmentation of DGS (several DGS in many Member States) that makes cooperation even more difficult.[15]

In particular, the coverage level of €50 000 is inappropriate for the old Member States (EU-15). The average size of household deposits in the EU-15 was about €41 400 as of end-2007. Assuming similar deposit growth rates as in the previous years (about 5% per year), one could expect an average deposit in those Member States of roughly €53 000 or €58 000 within the next 3-5 years respectively.

Moreover, under a coverage level of €50 000 Directive 2009/14/EC required Member States to increase the coverage level to at least €50 000 by end of June 2009 and obliges them to implement coverage level of €100 000 by the end of 2010 , only 91% of the number of eligible deposits would be covered It would not be useful to refer to total deposits since they contain a large part of ineligible deposits (i.e. by financial institutions) and their comparison with covered deposits would consequently not lead to relevant results. . This means that at least 9% of depositors are likely to run on a bank. Given that many depositors perceive themselves wealthier than they are, at a coverage level of € 50 000, there might even be more than 9% running on their bank. Papers of the Basel Committee for Banking Supervision define deposits as 'unstable' if there is a run-off-factor of 7.5% of depositors Basel Committee on Banking Supervision, International framework for liquidity risk measurement, standards and monitoring, December 2009/April 2010. . A coverage level at €50 000 would therefore be dangerously low.[16][17][18]

Directive 2009/14/EC required Member States to increase the coverage level to at least €50 000 by end of June 2009 and obliges them to implement coverage level of €100 000 by the end of 2010

It would not be useful to refer to total deposits since they contain a large part of ineligible deposits (i.e. by financial institutions) and their comparison with covered deposits would consequently not lead to relevant results.

Basel Committee on Banking Supervision, International framework for liquidity risk measurement, standards and monitoring, December 2009/April 2010.

As to the minimum harmonisation, the threat to consumer's confidence and financial stability will exist as long as there are different coverage levels in Member States. In this context, it should be noted that sizeable deposit movements, based solely on one factor (the coverage level), may involve significant costs for depositors (as, for example, they may lose some interest rate earnings due to switching from one bank to another), banking industry (as such sudden and significant outflow of deposits may create heavy liquidity strains to the banks experiencing it ), as well as real economy (as banks may limit their lending activity in times of financial instability, and eventually government intervention and the use of public funds may be necessary).

As indicated in recent international research See S. Schich , Challenges associated with the expansion of deposit insurance coverage during fall 2008, May 2009 ( http://www.economics-ejournal.org/economics/journalarticles/2009-20 ). , differences in deposit insurance guarantees across countries (as well as within a given country, i.e. co-existing different levels of deposit insurance for host-country banks and branches of foreign banks) may have implications for competition among banks operating in these markets as well as give rise to consumer protection issues. It is also argued that deposit insurance coverage – like any guarantee – gives rise to moral hazard and it is most relevant in the case of either implicit or explicit provision of unlimited coverage (such as those announced by some governments in autumn 2008). Finally, speaking of moral hazard and unlimited coverage, it is argued that once a government granted (limited or unlimited) guarantees, there may be a general perception that a government guarantee will always be made available during a crisis situation. [19]

See S. Schich , Challenges associated with the expansion of deposit insurance coverage during fall 2008, May 2009 ( http://www.economics-ejournal.org/economics/journalarticles/2009-20 ).

Moreover, in times of stability, some depositors might base their choice of product or service not on its price and quality but on the merits of the DGS that covers it, potentially distorting competition and limiting the benefits of the Internal Market since banks cannot choose their DGS. On the contrary, it could be argued that depositors might, in order to avoid having deposits above the coverage level, split up deposits and open accounts at several banks, which could actually enhance competition. However, it should be considered that such behaviour would seem to highly depend on the product (with savings accounts seeming easier to split than current accounts), on banks' policies, in particular 'product tying', i.e. offering better conditions if savings and current accounts are held at the same bank, and on the bank fees that could multiply. In UK, splitting up deposits was considered 'accidental' FSA, Consumer awareness of the Financial Services Compensation Scheme, Research Paper no. 75, January 2009, p. 9 ( http://www.fsa.gov.uk/pubs/consumer-research/crpr75.pdf ). and in the public consultation, on request only anecdotal evidence was provided that sometimes such splitting had been observed. [20]

FSA, Consumer awareness of the Financial Services Compensation Scheme, Research Paper no. 75, January 2009, p. 9 ( http://www.fsa.gov.uk/pubs/consumer-research/crpr75.pdf ).

The current Directive intends to mitigate such distortions by topping up arrangements. For a better understanding of their function, it is essential to know that the sole responsibility to reimburse depositors lies with the DGS of the country where the bank has its registered seat, regardless whether the bank is a stand-alone company or a subsidiary controlled by another company. This responsibility extends to all legally dependent parts of a bank, i.e. its branches, even if they are located in another Member State.

However, in case of branches, if the coverage in the host country is higher or more comprehensive than in the home country, the current regime provides the option for the bank to join the host country DGS for the difference in coverage. This is called 'topping up arrangement' and means that two DGS (from home and host country) are involved when depositors of such a branch are to be paid out. Topping up arrangements are very complex because the current Directive has only harmonised DGS on a minimum level and frictions occur if DGS operating under different national rules must cooperate. Topping up can also lead to delays in payout since two DGS, which have to coordinate their actions, are involved in the process. Such arrangements cause confusion for depositors who do not understand why they have to deal with two DGS for one account as is evident from complaints in the context of the failure of Icelandic banks.

4.1.2. Non-harmonised exemptions from a fixed coverage level

From end-2010, Member States will be required to fix coverage at a certain level for the DGS being subject to the Directive. Currently, exceptions from this fixed level are only granted to Member States where they had been in force on 1 January 2008 ('grandfathering'). Such exceptions, if limited to a few Member States, could lead to an unlevel playing field as described below in the context of diverging scope and eligibility criteria throughout the EU.

In particular, in DK, pension deposits are covered far beyond the coverage level, and in FI, temporary high account balances resulting from real estate transactions are also covered at a higher level. UK is considering the introduction of such protection extended to pension payments and compensations for damages or injuries (if paid as lump sums) and other life events, such as inheritance, divorce, etc. On the one hand, such exemptions could improve depositor confidence by better protecting their wealth in exceptional circumstances. On the other hand, the more numerous and complicated the exemptions, the more resources of the DGS (staff, time and money) are bound during the payout process.

4.1.3. Eligibility of depositors – discretionary exclusions

Annex I of Directive 94/19/EC allows Member States to exclude protection for many different types of depositors. Currently, Member States exclude most deposits and depositors enumerated in Annex I of the Directive (see Annex B to this report).

In general, the fact that the exclusions are discretionary entails some problems. First, it is questionable whether the protection is appropriate, i.e. if the depositors and deposits subject to the discretionary exclusions should be protected or not. While the inclusion of certain depositors or products could improve depositor confidence by better protecting their wealth, their exclusion would save money to DGS and banks financing them. Second, the wide range of discretion may lead to the same problems as widely diverging coverage levels: market distortions if depositors choose the most comprehensive DGS, not the best product. (see Section 4.3 ). Only well-informed depositors would act in this way. However, the fact that some depositors were alerted by the media in the financial crisis as far as failures of particular banks were considered likely does not mean that the majority of depositors were profoundly informed about their function. Consequently, it is also relevant that depositors may not always be informed whether they are eligible or not. Finally, differences in depositor and product eligibility stemming from the lack of harmonisation affect the ability of DGS to make fast payouts since such differences (notably if numerous) complicate the process of claims verification.

The discretionary exclusions and specific problems resulting from them can be categorised as follows:

· Enterprises in the financial sector , i.e. financial institutions, insurance, investment funds, pension funds (Annex I no. 1, 2, 5 and 6 of the Directive). Banks are ineligible under Article 2 of the Directive.

· Authorities at central and local level (Annex I no. 3 and 4). Authorities can be expected to act responsibly and not to run on banks. They are also quite limited in numbers in comparison with depositors Throughout the EU, there are 121 000 local authorities and more than 450 million depositors. and are subject to DGS coverage only in 7 Member States (CZ, DE (partially), DK, FI, GR, LT, PL and SE) . [21]

Throughout the EU, there are 121 000 local authorities and more than 450 million depositors.

· Depositors having a relationship with the failed bank , like managers, directors, important shareholders (>5%), auditors (and their close relatives), companies in the same group, depositors that obtained special conditions aggravating the financial situation of the bank (Annex I no. 7, 8, 9 and 11). Most of these depositors are difficult to identify and it leads to unnecessary payout delays to verify their eligibility. Moreover, such exclusions generally punish depositors who might not at all be responsible for the bank failure. In case of such exclusions, individual responsibility would be insinuated by law or determined by the DGS and not by the competent authorities and courts..

· Depositors who opened their account anonymously (Annex I no. 10). Anonymous accounts are now forbidden under Article 6(1) of Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing OJ L 309, 25.11.2005. . [22]

OJ L 309, 25.11.2005.

· Small and medium enterprises (SME). Currently, only deposits of companies that are permitted to draw up abridged balance sheets More precisely, companies which – as of their balance sheet dates – exceed the limits of at least two of the three following criteria: a balance sheet total of €4.4 million, a net turnover: €8.8 million or an average number of 50 employees during the financial year. Only companies can be excluded, i.e. not self-employed natural persons or partnerships (unless they are special partnerships where shares are issued; for details see Article 1(1) of Directive 78/660/EEC). must be covered (Annex I no. 14). This definition deviates from the Commission Recommendation on micro, small and medium enterprises Article 8(1) of the Annex to the Commission Recommendation 2003/361/EC of 6 May 2003, OJ L 124, p.36: "Any Community legislation or any Community programme to be amended or adopted and in which the term ‘SME’, ‘microenterprise’, ‘small enterprise’ or ‘medium-sized enterprise’, or any other similar term occurs, should refer to the definition contained in this Recommendation." In contrast to the current regime that allows the exclusion of certain companies , an SME can have any legal form. (Annex 10a to this impact assessment contains a comparison of the different categories of SME).[23][24]

More precisely, companies which – as of their balance sheet dates – exceed the limits of at least two of the three following criteria: a balance sheet total of €4.4 million, a net turnover: €8.8 million or an average number of 50 employees during the financial year. Only companies can be excluded, i.e. not self-employed natural persons or partnerships (unless they are special partnerships where shares are issued; for details see Article 1(1) of Directive 78/660/EEC).

Article 8(1) of the Annex to the Commission Recommendation 2003/361/EC of 6 May 2003, OJ L 124, p.36: "Any Community legislation or any Community programme to be amended or adopted and in which the term ‘SME’, ‘microenterprise’, ‘small enterprise’ or ‘medium-sized enterprise’, or any other similar term occurs, should refer to the definition contained in this Recommendation." In contrast to the current regime that allows the exclusion of certain companies , an SME can have any legal form.

The Commission has been explicitly tasked to examine whether the coverage of SME is appropriate. Since, according to Eurostat, there are 20 million SME representing the majority of enterprises in the EU (99.8%), their confidence is crucial as to the risk of bank runs. Among micro, small and medium enterprises, the largest group is the first one, but they are comparable in terms of the amount of their eligible deposits (see Annex 10c-d ).

The existence of smaller enterprises may be jeopardised if they have no access to their deposits after a bank failure, which may lead to negative consequences for the economy as a whole and strain public welfare. Moreover, determining during the payout procedure whether a company is an SME, i.e. if it is permitted to draw up abridged balance sheets (this comprises even companies whose balance sheet is not abridged), is time consuming, resource binding and therefore delaying payout for all depositors.

4.1.4. Scope of covered products

Currently, coverage of at least €50 000 per depositor and per bank Exceptions apply, see Article 8 of Directive 94/19/EC. is required by the Directive. Several deposits at the same bank are aggregated. There are considerable differences in the scope of deposits covered by DGS across the Member States (see Annex B). The mere existence of these differences raises level-playing field issues since depositors may choose the product according to the deposit protection offered, which a bank cannot choose and banks which cannot 'offer' such protection may suffer from competitive disadvantages. [25]

Exceptions apply, see Article 8 of Directive 94/19/EC.

Structured products

The current definition of 'deposit' in Article 1(1) of the Directive " 'Deposit' shall mean any credit balance which results from funds left in an account or from temporary situations deriving from normal banking transactions and which a credit institution must repay under the legal and contractual conditions applicable, and any debt evidenced by a certificate issued by a credit institution . " leaves some room for interpretation as regards the coverage of so-called 'structured products' See also the Communication on Packaged Retail Investment Products (PRIPS), COM(2009)402 (p.4) for a distinction between structured securities and structured deposits . A structured product is a combination of a deposit and an investment product, where the return is dependent on the performance of some underlying financial instrument such as market indices, equities, interest rates, commodities, foreign exchange, etc. These products incur market risk (i.e. the risk of a changing market price of the underlying) which is not covered by any protection scheme if the underlying is acquired directly. If only the interest is subject to a certain underlying, the principal of the deposit should be repaid in the worse case scenario at par; otherwise, the depositor could be repaid less than 100% of his deposit. Even though the current definition in Article 1(1) is not very concise and there is no other definition of deposits in Community law on financial services, it seems to be clear from the general meaning of the word deposit (i.e. to place for safekeeping or in trust) that deposited items usually have to be returned in full. Moreover, deposits have an inherent 'guarantee' as it is their key feature that they are 100% repayable so that there is no need for a guarantee apart from a deposit guarantee It should be noted that guaranteed repayments are also subject to a different prudential treatment than deposits. Repayment guarantees concerning a product incurring a loss when repayment is due, have to be treated as off-balance sheet items under Article 78 of Directive 2006/48/EC and its Annex II. Provision thus has to be taken in addition to the general prudential requirements that indirectly also aim at protecting deposits. . [26][27][28]

" 'Deposit' shall mean any credit balance which results from funds left in an account or from temporary situations deriving from normal banking transactions and which a credit institution must repay under the legal and contractual conditions applicable, and any debt evidenced by a certificate issued by a credit institution . "

See also the Communication on Packaged Retail Investment Products (PRIPS), COM(2009)402 (p.4) for a distinction between structured securities and structured deposits

It should be noted that guaranteed repayments are also subject to a different prudential treatment than deposits. Repayment guarantees concerning a product incurring a loss when repayment is due, have to be treated as off-balance sheet items under Article 78 of Directive 2006/48/EC and its Annex II. Provision thus has to be taken in addition to the general prudential requirements that indirectly also aim at protecting deposits.

If products (i) which incur market risk, (ii) are subject to a particular guarantee, or (iii) whose principal is not repaid at par, were to be covered by DGS, it could lead to additional losses for DGS if they had to cover particular risks incurred by such products. As explained above, ICS would not cover market risk either (for more information on ICS, see Annex C).

Debt certificates issued by a credit institution

The coverage of debt certificates issued by a credit institution (Annex I of the Directive, no. 12) is subject to the discretion of Member States. In case of debt securities issued by a bank, their market price (if any) depends mainly on the insolvency risk of the issuer (i.e. the bank) and a change of interest rates.

In contrast to this, in case of debt securities issued by non-banks these risks are covered neither by DGS nor by ICS. Consequently, banks as issuers of debt securities are privileged over other issuers. This argument was also raised during the public consultation by investment funds associations who feared competitive distortions since deposits of investment funds are not covered by DGS either.

Moreover, holders of debt securities can in general not exercise their claims against the bank before maturity, so unlike with regard to holders of savings or current accounts, there is a limited risk for bank runs.

More specifically, the current setup regarding debt securities is inconsistent in itself. While 'debt evidenced by a certificate' is covered by DGS, 'debt securities and liabilities arising out of own acceptances and promissory notes' can be excluded from coverage. However, despite the different terms both categories seem identical since a debt security is typically a debt evidenced by a certificate. Own acceptances and promissory notes are also debt evidenced by a certificate.

This is also confusing for depositors. In all but three Member States (HU, LV and SE) In DE, such products are included by mutual guarantee schemes. However, these schemes are not subject to Directive 94/19/EC. 'debt securities and liabilities arising out of own acceptances and promissory notes' are excluded (see Annex B).[29]

In DE, such products are included by mutual guarantee schemes. However, these schemes are not subject to Directive 94/19/EC.

Deposits in currencies of non-EU countries

The coverage of deposits in currencies of non-EU countries (Annex I no. 13) is subject to the discretion of Member States. In 6 Member States, such accounts are currently excluded (AT, BE, CY, DE, LT and MT). However, exclusion of such deposits may lead to an inappropriate coverage, in particular for SME which might need such accounts for dealing with non-EU countries. Moreover, in a globalised world, such accounts may be necessary where some members of families live abroad. Their exclusion could thus be regarded unfair for them.

Overlap between DGS and investor compensation schemes (ICS)

In contrast to the DGS Directive, Directive 97/9/EC on ICS shall cover losses of investors in securities, such as equities and bonds, but also money linked to transactions in those investments in specific cases (see Chapter 1 and Annex C).

However, securities (i.e. debt evidenced by a certificate issued by a credit institution) and money linked to transactions in investments (such as the proceeds arising from a sale of an investment product or money paid for buying an investment product so long as the transaction has not been executed yet) can fall within the scope of both the DGS and ICS Directives. In such cases Member States have discretion to choose one scheme they consider appropriate so as to prevent a reimbursement taking place twice Directive 97/9/EC on investor compensation schemes, Article 2(3). .[30]

Directive 97/9/EC on investor compensation schemes, Article 2(3).

However, ICS and DGS provide different kinds of safeguards for consumers. The recent changes of DGS by Directive 2009/14/EC (notably the increase of the coverage level to €100 000) have not been taken over by the ICS Directive. In particular, compared with DGS there are no strict time limits for triggering the ICS. Whereas from end-2010 onwards the DGS has to be triggered at the latest one week after the inability to repay deposits, there is no comparable deadline for ICS but changes are underway.

An unlimited discretion for Member States to choose the scheme if the products concerned fall both within the scope of ICS and DGS could therefore circumvent the improvements achieved for depositors. This could in extremis mean that it is in the discretion of Member States to pay depositors much less after a longer period of time.

4.2. Inadequate payout procedures

4.2.1. Inappropriate payout delay

Under the current regime, depositors must be paid out within 3 months after the bank has declared to be unable to repay deposits. From the end of 2010, this delay has to be reduced to 20 working days with a possible extension of further 10 working days (i.e. 4 to 6 weeks). Currently, competent authorities must determine the 'inability to repay deposits' (i.e. the triggering date) within 21 days and from end-2010 onwards within 5 working days (i.e. one week) According to the collected data, 93% of deposits were repaid within 3 months, and around 97% within 9 months; concerning the number of reimbursed depositors, the average ranged from 72%, within 3 months, to 82%, within 9 months. . These delays must be taken into account for calculating the actual payout delay. The maximum delay from 2010 onwards will thus be 7 weeks. However, there are better practices. Even if the US scheme (which pays depositors out within two working days "It is the FDIC's goal to make deposit insurance payments within two business days of the failure of the insured institution" (see http://www.fdic.gov/consumers/banking/facts/payment.html ). ) is not a fully relevant example for EU DGS at the moment The US FDIC has a much broader mandate than EU DGS (it acts as supervisor, paybox and receiver). Moreover, it makes payouts after a 90-day pre-closing period. , it should be noted that the UK authorities envisaged shortening the payout delay to one week Bank of England, HM Treasury, FSA, Financial stability and depositor protection: further consultation, July 2008, p. 74 ( http://www.fsa.gov.uk/pubs/cp/jointcp_stability.pdf ); see also Ernst & Young, Fast payout study – final report, November 2008 (report commissioned by the FSA, BBA and FSCS, available at http://www.fsa.gov.uk/pubs/other/fast_payout_report.pdf ). . [31][32][33][34]

According to the collected data, 93% of deposits were repaid within 3 months, and around 97% within 9 months; concerning the number of reimbursed depositors, the average ranged from 72%, within 3 months, to 82%, within 9 months.

"It is the FDIC's goal to make deposit insurance payments within two business days of the failure of the insured institution" (see http://www.fdic.gov/consumers/banking/facts/payment.html ).

The US FDIC has a much broader mandate than EU DGS (it acts as supervisor, paybox and receiver). Moreover, it makes payouts after a 90-day pre-closing period.

Bank of England, HM Treasury, FSA, Financial stability and depositor protection: further consultation, July 2008, p. 74 ( http://www.fsa.gov.uk/pubs/cp/jointcp_stability.pdf ); see also Ernst & Young, Fast payout study – final report, November 2008 (report commissioned by the FSA, BBA and FSCS, available at http://www.fsa.gov.uk/pubs/other/fast_payout_report.pdf ).

The payout delay of 4-6 weeks is simply too long since depositors need constant access to their funds in order to buy food, pay bills, etc. If depositors have the choice to withdraw their deposits before the DGS is triggered or to wait several weeks after the DGS steps in, they will run on their banks since most of them would not have the funds for their usual expenses available for more than a few days FSA, Consumer awareness of the Financial Services Compensation Scheme, op.cit., p. 11: " With regard to how long they felt they could cope if they were cut off from their current or deposit accounts (i.e. if their bank failed), respondents’ answers varied with their circumstances: those with only a current account, limited savings and few or no cards to fall back on felt they could only manage for up to a couple of weeks, which they would do by borrowing, primarily from family members. Some felt they could not manage for more than a few days or a week." . Thus, the possibility of long delays would prompt a run on a bank even if deposits were 100% covered. Furthermore, bank customers with a current account need access to basic banking services.[35]

FSA, Consumer awareness of the Financial Services Compensation Scheme, op.cit., p. 11: " With regard to how long they felt they could cope if they were cut off from their current or deposit accounts (i.e. if their bank failed), respondents’ answers varied with their circumstances: those with only a current account, limited savings and few or no cards to fall back on felt they could only manage for up to a couple of weeks, which they would do by borrowing, primarily from family members. Some felt they could not manage for more than a few days or a week."

Long payout delays are also caused by late access to information about deposits and the lack of human and technical resources of DGS EFDI, Report on improvement of payment delays to depositors and promotion of best practices, May 2008, pp. 35, 37, 42 and 43. . Three quarters of all DGS have to rely on external workforce (see Annex 27), half of DGS have no regular access to deposit information and only one third has any contingency planning in place Ibid, p. 38. .[36][37]

EFDI, Report on improvement of payment delays to depositors and promotion of best practices, May 2008, pp. 35, 37, 42 and 43.

Ibid, p. 38.

At any rate, the forthcoming deadline being calculated in working days (according to the proposal as finally adopted – see Annex A) entails additional problems. Since there are different national holidays, this is not only opaque for depositors but can also lead to different payout delays in cross-border cases.

4.2.2. Inadequate payout modalities

In their correspondence to the Commission, depositors raised concerns about the payout modalities. Many depositors were concerned that in some recent bank failures there was no information provided by DGS in depositors' language about the state of play and on how to submit claims (or information was late and outdated). The mere need for claims – often still to be submitted on paper and based on information that in case of 'internet banks' may not be accessible when websites of such a bank are not operational – constituted a serious problem for depositors. Any difficulty and lack of transparent processes before and during the payout procedure may undermine depositor confidence in DGS.

Currently, 30 DGS pay depositors out in the currency of their Member State whereas 5 DGS pay them out in the currency 'as paid in' Ibid, p. 27. . Some depositors were worried that they would receive their reimbursement in the currency of the bank's home country even though their deposits were denominated in euro. The possibility to transfer currency risk to depositors may undermine their confidence in DGS and – at least together with other problems – induce a run on banks. Moreover, a payout in a different currency than the one of the DGS is likely to delay the process.[38]

Ibid, p. 27.

It should be noted that this risk of delay does not only materialise in case of deposits in currencies other than the currency of the Member State where a bank or a branch is located but also in the situation where e.g. a bank from a country outside the euro area opens its branch in a euro-area country and deposits are taken in euro. In this respect, a payout in another currency than paid in could also have distortive effects since deposits with branches of foreign banks would become less attractive then.

Currently, two thirds of DGS pay interest until the date of failure; those paying longer apply a fixed rate, a market rate or the originally agreed rate Ibid, p. 40. . Depositors were worried that payout might not include interest payments if those would only be due after the time of failure. [39]

Ibid, p. 40.

This shows that under the current approach depositors have no clear picture about how payout is executed and what they receive in case interest has not yet been credited to their account, in particular when the failure happens before interests are due, i.e. before maturity. The impact of this uncertainty on the possibility of bank runs may be low since interest rates on current accounts, are normally quite low and savings deposits may - pending their conditions - not be eligible for withdrawal before maturity or if so, interest payments would be reduced anyway. However, any uncertainty does not contribute to trust in DGS which is a prerequisite for financial stability.

Moreover, with regard to structured products, the calculation of the interest payment may be difficult and time-consuming or may even sometimes not be calculable at all. Similarly, banks offering exceptionally high interest rates could lead to financing problems of DGS if this has not been taken into account when calculating the contributions of such banks. Both issues are not dealt with by the current Directive.

4.2.3. Inappropriate set-off arrangements

Currently, 22 Member States allow that deposits are set off against due liabilities of the depositor (e.g. instalments of mortgages) at the same bank or counterclaims against the depositor (e.g. the entire mortgage loan). This is not the case under normal circumstances if instalments are duly paid. In such case, if liabilities reach or exceed deposits, set off with due claims or counterclaims reduces and, in extreme cases, eliminates any payout from a DGS. If depositors know that their deposits and liabilities will be set off, they will prefer to run on their banks in order to get their deposits paid out in full. Those who do not do so might be paid out nothing and put under financial stress. Moreover, determining liabilities and matching them with deposits is time consuming and therefore likely to delay payout Ibid, p.23: " Out of those DGS that apply set-off, 40% have experienced deposit payout. Five DGS applying set-off had asked for an extension of the three months period (45%)." .[40]

Ibid, p.23: " Out of those DGS that apply set-off, 40% have experienced deposit payout. Five DGS applying set-off had asked for an extension of the three months period (45%)."

4.3. Insufficient depositor information

Currently, actual and intending depositors must receive the information about the DGS covering their deposits including the amount and scope of coverage and whether their deposits are eligible or not. That information must be made available in a readily comprehensible manner. Information must also be given on request on the conditions for compensation and the formalities which must be completed to obtain compensation. All information must be given in the languages of the Member State in which the bank or the branch is established. It is within the discretion of Member States how exactly the information is provided.

If depositors do not know whether and to what extent their deposits are protected, there is a risk that they will run on their banks in times of crisis. They may also hesitate to deposit their money at foreign banks or branches if they do not know how other country schemes function. They might be concerned that in case of a bank failure, they might not get their money back since they might not know or understand the procedures to follow. Depositors might be susceptible to financial losses if they discovered only after the fact that they are not eligible or that not all their financial products are covered or that all their deposits at one bank are aggregated in order to determine whether they are covered. And if they are uncertain about any of these aspects of deposit protection, it could lead to the lack of confidence in DGS, thus contributing to the possibility of a run on banks.

In 2008 and 2009, the Commission received many requests from citizens who wanted to know how their deposits are protected. The Commission services understand that DGS or consumer organisations also received many such requests. The lack of awareness about the key features of the responsible DGS is illustrated by recent consumer research undertaken in the UK FSA, Consumer awareness of the Financial Services Compensation Scheme, op.cit., p. 19: " Although awareness of the FSCS [the UK DGS] by name was very low among the groups, many respondents thought there was ‘something’, and a few of the wealthier respondents mentioned a figure of around £30,000-£35,000 of savings which was guaranteed. All the Northern Rock customers knew it was £35,000 but were still unfamiliar with the FSCS by name. Almost nobody knew anything more about the scheme or how it worked (e.g. with regard to protection being based on a bank's authorisation or debt and savings relationships), and none knew how it was funded. (…) Without guidance, most assumed it to be a government scheme or some form of private sector insurance." .[41]

FSA, Consumer awareness of the Financial Services Compensation Scheme, op.cit., p. 19: " Although awareness of the FSCS [the UK DGS] by name was very low among the groups, many respondents thought there was ‘something’, and a few of the wealthier respondents mentioned a figure of around £30,000-£35,000 of savings which was guaranteed. All the Northern Rock customers knew it was £35,000 but were still unfamiliar with the FSCS by name. Almost nobody knew anything more about the scheme or how it worked (e.g. with regard to protection being based on a bank's authorisation or debt and savings relationships), and none knew how it was funded. (…) Without guidance, most assumed it to be a government scheme or some form of private sector insurance."

Even though a relatively high number of depositors was alerted by the media in the financial crisis about the strength of their DGS in particular cases and sometimes this led to shifting deposits elsewhere as described above, the correspondence addressed to the Commission services shows that many depositors did not feel profoundly informed about the function of DGS.

For example, depositors at branches of Icelandic banks complained to the Commission that the distinction between branches and subsidiaries, which can lead to different DGS dealing with payout, was confusing (see Section 4.6). Those depositors preferred a point of contact in their country of residence and consequently, in their language. Others were worried that payout might not include interest payments if the interest payments would only be due after the time of failure. Currently, these issues are indeed not dealt with by the Directive. This lack of clarity compromises depositor confidence.

All deposits of a depositor at a bank including its branches are aggregated. If a depositor has e.g. a savings account of €30 000 and a current account of €40 000 at the same bank, the depositor would only receive €50 000 if this is the coverage level in a Member State. This may lead to problems if different products such as savings and current accounts are traded under different brand names even if they are sold by the same bank This situation occurs in particular in UK. . In such a case, the depositor may not know that both accounts are aggregated for the purpose of calculating the coverage level.[42]

This situation occurs in particular in UK.

A lack of information about what and to which extent products are covered by DGS may also lead to choosing inappropriate products and consumers may thus not fully exploit all options available in the Internal Market.

4.4. Inappropriate financing of DGS

4.4.1. Different DGS funding mechanisms and bank financing obligations across the EU

DGS are principally funded by banks paying contributions to them. Currently, in 21 Member States such contributions are paid in advance on a regular basis (ex-ante) while in six Member States (AT, IT, LU, NL, SI and UK) banks only contribute after a failure (ex-post). Other financing sources are loans taken by the DGS or direct state interventions.

Consequently, the level of DGS funding is very different throughout the EU. Ex-post funded DGS have no funds available when there is no bank failure. In terms of the ratio between ex-ante funds and eligible deposits (coverage ratio, see also Annex 16), there is a range between 0.01% and 2.3%. For smaller banks (i.e. banks not belonging to the top-10 deposit takers at each DGS), these ratios are much higher with an average of 7.9%. To illustrate these percentages, the amount of ex-ante funds ranged in 2007 between €6.9 million in MT and €6.5 billion in ES. At the same time, the maximum resources available to DGS (ex-ante schemes plus ex-post contributions) amounted to between €27 million and €8.1 billion in those Member States respectively. For comparison, the amount of eligible deposits in the EU is about €9.3 trillion and the amount of covered deposits (under Directive 2009/14/EC and the coverage level of €100 000) is about €6.7 trillion (see Annexes 2, 3 and 13a).

When the financial crisis aggravated in autumn 2008, DGS have turned out to be underfinanced. The most prominent example is Iceland, an EEA country where the DGS Directive applies. The DGS had available ISK 15 billion (approx. €120 million as of 1 September 2008) in ex-ante funds, equivalent to 0.5% of deposits and ISK 6 billion guarantees as additional resources K. Jännäri, Report on banking supervision in Iceland: past, present and future, 30 March 2009, p. 8. . The savings deposits at branches of two Icelandic banks (Landsbanki and Kaupthing) in DE, NL and UK alone amounted to more than €8 billion Ibid, p. 17. . [43][44]

K. Jännäri, Report on banking supervision in Iceland: past, present and future, 30 March 2009, p. 8.

Ibid, p. 17.

In the context of the above, it is argued that in order to make deposit guarantees credible it is important to specify how they will financially be provided. The need for sound funding to ensure the effectiveness and credibility of DGS was emphasized by the developments in autumn 2008 when most Member States raised their coverage levels without any financial strengthening of their DGS. Therefore, there may be questions regarding the capacity of (some) governments to provide for the implicit or explicit guarantee that they have announced S. Schich , Challenges associated with the expansion of deposit insurance coverage during fall 2008, op.cit. .[45]

S. Schich , Challenges associated with the expansion of deposit insurance coverage during fall 2008, op.cit.

The Commission's research has shown that DGS in 6 Member States would not be capable to cope with a medium-sized bank failure The six Member States were BE, CY, IE, IT, LV and MT. A medium-sized failure was defined in this context (representing a failure of intermediate size which occurred in an EU-12 country in 2003) as a failure concerning 0.81% of eligible deposits. Many other Member States had to rely on unlimited borrowing facilities in order to cope with a failure of that size (see JRC Report on the efficiency of DGS, May 2008). . In one Member State (SK), the scheme has just overcome a deficit in which it had been for years. In DE, the voluntary DGS had to apply for a state guarantee of €6.7 billion following the failure of a subsidiary of Lehman Brothers Commission Decision no. 17/2009 of 21 January 2009 (see press release IP/09/114). . Even if a single DGS might never be able to cope with a failure of a large cross-border banking group, they should at least be able to deal with medium-sized failures. It should be noted that the DGS Directive is applicable regardless of whether there is a systemic crisis or not. Otherwise it could not fulfil its objective to prevent bank runs. If DGS have insufficient funds, depositors may be paid out only after a very long delay or not paid out at all. If depositors are aware of this, they will lose confidence in DGS and may potentially run on their banks.[46][47]

The six Member States were BE, CY, IE, IT, LV and MT. A medium-sized failure was defined in this context (representing a failure of intermediate size which occurred in an EU-12 country in 2003) as a failure concerning 0.81% of eligible deposits. Many other Member States had to rely on unlimited borrowing facilities in order to cope with a failure of that size (see JRC Report on the efficiency of DGS, May 2008).

Commission Decision no. 17/2009 of 21 January 2009 (see press release IP/09/114).

The lack of harmonisation as regards DGS funding may affect not only depositor confidence but also banks' competitiveness and behaviour (as it leads to significant differences in bank contributions to DGS). First of all, mere ex-post funding is pro-cyclical: it encourages risk-taking in good times, but drains liquidity from banks in times of stress which might have implications on the level and conditions of credit supply by banks. Moreover, unlike in ex-ante schemes the failed bank does not contribute to payout (moral hazard). Banks that do not have to pay ex-ante contributions are able to generate returns on these funds, which constitutes a competitive advantage vis-à-vis their competitors in other Member States with ex-ante funded DGS. This was raised by many banks and banking associations in the public consultation conducted by the Commission last year. In contrast to this, there is research concluding that "mispriced deposit insurance and capital regulation were of second order importance in determining the capital structure of large US and European banks" (see R. Gropp, F. Heider, The determinants of bank capital structure, ECB Working Paper No. 1096, September 2009).[48]

In contrast to this, there is research concluding that "mispriced deposit insurance and capital regulation were of second order importance in determining the capital structure of large US and European banks" (see R. Gropp, F. Heider, The determinants of bank capital structure, ECB Working Paper No. 1096, September 2009).

The access to funding beyond ex-ante funds is different, too. All but 7 DGS can borrow money from different sources, but 3 DGS only to a limited extent. This is problematic since ex-ante funds alone may not be sufficient to pay out depositors. Where ex-ante funds are collected, the ratio between extraordinary (including ex-post) funds and total funds is between 1.4% in SE and 82% in CY (see Annex 13a). If needed, all ex-ante funded DGS can request supplementary contributions from banks but the extent is very different (see Annex 13b). Taking into account additional ex-post financing facilities for ex-ante financed schemes, the coverage ratio ranges between 0.1% and 3.1%, while for smaller banks (as defined above) the average is 19.6%.

If not all DGS are equally sound and capable to deal with a bank failure of a certain size, there may also be repercussions for the functioning of the Internal Market. Banks from Member States with very weak DGS, which establish branches in another Member State, can do so without being hindered by the host country. However, if the home country DGS is considered incapable by the host country to deal with a bank failure, the host country may not like to rely on the prudential supervision exercised by the home country. In the context of the recent Icelandic bank failures, this has led to Member States reflecting upon measures which might create obstacles to the freedom of establishment (i.e. to set up branches), implying a less open Internal Market FSA, The Turner Review – A regulatory response to the global banking crisis, March 2009, p. 100 et seq. ( http://www.fsa.gov.uk/pubs/other/turner_review.pdf ). . [49]

FSA, The Turner Review – A regulatory response to the global banking crisis, March 2009, p. 100 et seq. ( http://www.fsa.gov.uk/pubs/other/turner_review.pdf ).

Moreover, banking groups intending to reorganise themselves under the European Company statute have perceived it as tedious and burdensome to change the DGS when their subsidiaries would turn into branches, in particular because they did not receive their previously paid contributions back from the scheme they left but also had to pay contributions to the new scheme.

4.4.2. B anks contributions to DGS not adjusted to risk

In most Member States banks pay their contributions to DGS as a fixed percentage of deposits (usually eligible deposits). The degree of risk incurred by a given bank is not taken into account. This may be perceived by risk-averse banks as a competitive disadvantage and as a disincentive for sound risk management which may also make the financial system more vulnerable and induce adverse selection.

This report does not, however, deal with systemic risk since criteria for measuring it are only being developed on international level.

4.5. Limited mandates of DGS

The powers to manage bank crises are split between different domestic authorities , ranging from supervisory authorities to central banks, governments, judicial authorities and in some cases DGS. Also, the extent of powers and the conditions governing their use differ according to each national system. This entails inefficient cross border bank resolutions process and suboptimal outcomes Impact Assessment accompanying the Communication on an EU framework for cross-border crisis management in the banking sector , SEC(2009)1389, p. 30. . [50]

Impact Assessment accompanying the Communication on an EU framework for cross-border crisis management in the banking sector , SEC(2009)1389, p. 30.

In this context, the Commission Communication on an EU framework for cross-border crisis management in the banking sector (COM(2009)561) states the following:

" Deposit guarantee schemes could include the possibility of funding resolution measures. This would have the advantage that the banking sector would contribute directly to ensuring its own stability. However, this should not be to the detriment of compensating retail depositors in the event of a bank failure. In its review of the operation of deposit guarantee schemes to be brought forward in early 2010, the Commission will examine the use of deposit guarantee schemes in the context of the crisis. Alternatively, as some Member States do, the Commission could explore the creation of a resolution fund, potentially funded by charges on financial institutions which might be calibrated to reflect size or market activity. "

An assessment of the creation of a resolution fund would go beyond this impact assessment and will be performed as a follow-up to the Communication referred to above.

Currently, in 11 Member States DGS have varying powers beyond the mere payout of depositors ('paybox' function) such as liquidity support, restructuring support or liquidation role (see Annex D). Such transactions may be rational if the cost for successful reorganisation is smaller for the DGS than the total payout to the same bank in the event of bankruptcy (the so-called 'least-cost principle'). The lack of coherence between national DGS roles may further impede coordinated actions on a cross-border basis. If a DGS can use its funds to support a bank in one Member State but this is not the case in another Member State, private sector in the former may not be willing to participate in the negotiations concerning e.g. a reorganisation of the bank As defined in Article 2 of Directive 2001/24/EC: "measures which are intended to preserve or restore the financial situation of a credit institution and which could affect third parties' pre-existing rights, including measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims" . if the private sector does not contribute to a similar extent than in the latter. A reorganisation of a bank could fail for such a reason, leaving the taxpayer to pay or causing financial and economic turmoil when a bank has to be liquidated. This is aggravated by the fragmentation of DGS since even a reorganisation in a Member State may be difficult if only one of several DGS can provide support and the other schemes refuse.[51]

As defined in Article 2 of Directive 2001/24/EC: "measures which are intended to preserve or restore the financial situation of a credit institution and which could affect third parties' pre-existing rights, including measures involving the possibility of a suspension of payments, suspension of enforcement measures or reduction of claims" .

The funds of a soundly financed DGS originate from the banks themselves. However, the current financial crisis has shown that when banks threatened to fail, they were bailed out mainly with taxpayers' money amounting to almost €13 billion in the EU Without guarantees that are only commitments and not effective when granted (source: Public Finances in EMU (2009), p. 44, http://ec.europa.eu/economy_finance/publications/publication15390_en.pdf ). .[52]

Without guarantees that are only commitments and not effective when granted (source: Public Finances in EMU (2009), p. 44, http://ec.europa.eu/economy_finance/publications/publication15390_en.pdf ).

In most Member States, the funds of DGS are either not sufficiently financed to even fulfil their 'paybox' role (see Section 4.4 ) or lack the power to participate in early interventions aiming at preventing a failure. If DGS have broader mandates, there could be a double impact by a restructuring and a payout at the same time even if occurring at different banks.

4.6. Fragmentation and limited cross-border cooperation between DGS

The high degree of fragmentation may mean that DGS with fewer resources would be hit more by a relatively big failure than a DGS with more resources be hit by a failure of a bank of the same size ('insurance effect'). This uneven distribution of risk is aggravated by the fact that there is no mutual borrowing between schemes of different Member States and sometimes not even between schemes within the same country. As a result, it is likely that the taxpayer would have to step in if a DGS has insufficient financial resources.

This is illustrated by the failure of an Icelandic bank that operated mainly via Internet and had a branch with 30 000 depositors in DE. Many depositors complained that German authorities and German DGS referred depositors to the Icelandic DGS. This is why a general obligation to mutually cooperate has already been introduced by Directive 2009/14/EC. However, this obligation is rather generic and does not require the host country DGS to assist and pay out depositors whose deposits are with a branch of a bank from another Member State (and the home DGS is primarily responsible). A payout by the host DGS on behalf of the home DGS has been requested in many complaints and petitions from depositors See e.g. Petition no. 1567/2008. . It can thus be concluded that currently there is no incentive for home country DGS to care about depositors in other Member States (i.e. host countries).[53]

See e.g. Petition no. 1567/2008.

In the context of the new EU financial supervisory architecture Commission Communication of 27 May 2009 on European financial supervision (COM(2009)252) and Proposal for a Regulation establishing a European Banking Authority (COM(2009)501). it has become more and more obvious that the supervisory cooperation for cross-border banking groups must be improved. Since banking supervisors are involved in the decision whether a bank should be saved or the DGS triggered, the fragmentation of DGS does not provide incentives for supervisors to reach a solution that is in the interest of all depositors of a banking group and takes into account the potential impact on the financial stability of all Member States concerned as required by Article 42a(3), second subparagraph, of Directive 2006/48/EC. While progress on burden sharing and resolution mechanisms is deemed critical to reinforcing trust between national authorities, the current degree of fragmentation would set incentives to deal separately with each subsidiary which could favour some creditors or depositors in one country compared to others COM(2009)561, p. 8. .[54][55]

Commission Communication of 27 May 2009 on European financial supervision (COM(2009)252) and Proposal for a Regulation establishing a European Banking Authority (COM(2009)501).

COM(2009)561, p. 8.

Moreover, on 23 September 2009, the Commission adopted proposals for three Regulations establishing the European System of Financial Supervisors including the creation of the three European Supervisory Authorities. The new European Banking Authority will further coordinate banking supervision, in particular by setting technical standards and settling disagreements.

4.7. Exemption of mutual and voluntary guarantee schemes from the DGS Directive

Mutual guarantee schemes are schemes ensuring mutual protection of their members, i.e. preventing a bank failure A mutual guarantee system protects the credit institution itself and ensures its liquidity and solvency. In an emergency, the other members of the system step in and support the bank. Such systems have in particular been established by cooperative and savings banks in AT and DE. . They exist mainly in the sector of cooperative and savings banks in AT and DE. Consequently, there is in principle no need to pay out depositors since their banks’ operations would not cease. Voluntary guarantee schemes do not protect banks from failures but, based on a contract between members, in case of failure offer coverage of deposits that is higher and/or wider in scope than the statutory DGS subject to the Directive. Currently, there is only one such a scheme in DE that offer quasi-unlimited protection. [56]

A mutual guarantee system protects the credit institution itself and ensures its liquidity and solvency. In an emergency, the other members of the system step in and support the bank. Such systems have in particular been established by cooperative and savings banks in AT and DE.

Mutual guarantee schemes are exempt from the Directive if they fulfil the criteria under Article 3(1) and are acknowledged under Article 80(8) of Directive 2006/48/EC in another context (zero risk-weight of exposures between banks adhering to such scheme). Both articles are not consistent with each other (see Annex E for details). Voluntary schemes are not covered by the Directive at all.

Mutual guarantee schemes have been advertising with 'unlimited protection' See references in the consultation paper: http://ec.europa.eu/internal_market/consultations/2009/deposit_guarantee_schemes_en.htm . even though they do not offer higher coverage as such. Depositors have thus not been adequately informed about their functioning. Maintaining the status quo, i.e. leaving such schemes apart and further advertising with 'unlimited protection', could lead to competitive distortions if from end-2010 onwards all DGS under the Directive are prohibited to increase their coverage levels above €100 000. [57]

See references in the consultation paper: http://ec.europa.eu/internal_market/consultations/2009/deposit_guarantee_schemes_en.htm .

Voluntary and mutual schemes are based on a contract between their members and most of them do not provide rights to depositors to claim reimbursement in the event of a bank failure A notable exception is the 'Raiffeisen-Kundengarantiegemeinschaft Österreich' for cooperative banks in AT. Article 14 of their statutes stipulates: "[In case of insolvency of a member], the association has to honour the protected claims against the [member] (…). To the extent that the claims are also subject to the statutory DGS, the claims are honoured on behalf of the statutory DGS." . However, Article 10 sets out that depositors shall have a claim against DGS under the Directive (for those DGS that are not exempt like the mutual schemes). This is not clearly mentioned on the above schemes' websites leading to the lack of depositor information.[58]

A notable exception is the 'Raiffeisen-Kundengarantiegemeinschaft Österreich' for cooperative banks in AT. Article 14 of their statutes stipulates: "[In case of insolvency of a member], the association has to honour the protected claims against the [member] (…). To the extent that the claims are also subject to the statutory DGS, the claims are honoured on behalf of the statutory DGS."

Moreover, since mutual schemes are exempt from the Directive, depositors would not be covered if a mutual system collapses This is the case in DE, but not in AT where all banks including members of a mutual scheme ('Haftungsverbund' or 'Solidaritätsverein') have to be members of a DGS. . In this context, it should be noted that details about the funds available to mutual and voluntary schemes have not been disclosed, even on request. It leaves plenty of room for speculation about their financial capacity. The voluntary scheme for private banks in DE, which promises coverage of up to one third of the bank’s own funds per depositor (i.e. de facto unlimited), asked for €6.7 billion state aid in 2008 (see Section 4.4.1) and has recently doubled contributions to be paid by its members Handelsblatt, 18 January 2010. . A large insurance company has recently explained that it did not trust the deposit insurance of the private banks Süddeutsche Zeitung, 20 January 2010, www.sueddeutsche.de/finanzen/440/500704/text/print.html . . Despite the voluntary and mutual schemes in Germany, political unlimited deposit guarantee was given. Moreover, many of the German Landesbanken in distress which are members of the mutual guarantee scheme of German savings banks (except WestLB Frankfurter Allgemeine Zeitung of 25 November 2009, p. 13. ) received state aid so that this scheme did not have to be tested. The protection of depositors could thus be compromised if they are not protected by a DGS under the Directive.[59][60][61][62]

This is the case in DE, but not in AT where all banks including members of a mutual scheme ('Haftungsverbund' or 'Solidaritätsverein') have to be members of a DGS.

Handelsblatt, 18 January 2010.

Süddeutsche Zeitung, 20 January 2010, www.sueddeutsche.de/finanzen/440/500704/text/print.html .

Frankfurter Allgemeine Zeitung of 25 November 2009, p. 13.

4.8. Baseline scenario

If the status quo is maintained, the fixed coverage level of €100 000 – paid out by DGS within maximum 4 to 6 weeks from the moment a bank is declared insolvent – will apply EU-wide from end-2010 onwards. This long payout delay together with the lack of financial capacity of some schemes would be insufficient to deter depositors from running to their banks in order to get all their deposits immediately (which happened in UK in 2007 under a coverage of only £ 35 000) and could have severe economic consequences. Moreover, the perspective of depositors who owe money to their bank to be reimbursed less or not at all (set-off) in case of a bank failure will not calm down the depositors concerned. Consequently, the Directive would not meet its objectives in terms of protecting depositor wealth, preventing bank runs and contributing to financial stability.

A varying scope of covered products and different eligibility criteria for protected depositors in the EU, combined with the lack of information on whether deposits are covered, would lead to depositors searching for the 'best DGS' when depositing their money instead of looking for the 'best product' or 'best service' (see 4.1).

This and the lack of mutual cooperation between schemes in cross-border situations and the perspective of having to deal with a DGS in another language (as shown after the failure of the Icelandic banks) would lead to choosing between domestic banks only. The potential of the Internal Market would thus remain untapped. The new supervisory architecture described under would also be hampered by fragmentation and a lack of coordination (see above 4.5 and 4.6).

Banks, in particular those operating cross-border, would still suffer from an unlevel playing field if they have to pay high contributions in one Member State, but none in another one so long as there is no bank failure. In the latter case, they would have to provide liquidity to the DGS in times of general stress on banks’ liquidity. Banks will also suffer from adverse selection, if a sound and prudent bank has to pay the same contributions as a bank of the same size operating under an aggressive business model at the margin of prudential regulation and incurring higher risks.

Graph 1: Problem tree

(...PICT...)

(...PICT...)

Source: Commission services.

5. SUBSIDIARITY

Only EU action can ensure that credit institutions operating in more than one Member State are subject to the same requirements concerning DGS, which ensures a level playing field, avoids unwarranted compliance costs for cross-border activities and thereby promotes further integration within the Internal Market. Without harmonising the financing of DGS, depositor confidence could not be maintained. EU action therefore ensures a high level of financial stability in the EU.

Namely the harmonisation of coverage, scope and eligibility of depositors, and of payout delays cannot be sufficiently achieved by Member States because it requires the harmonisation of a multitude of different rules existing in the legal systems of various Member States and can therefore be better achieved at EU level.

This has already been acknowledged by the existing Directives on DGS Recital 17 of Directive 2009/14/EC and Recitals (not numbered) of Directive 94/19/EC. , which are all based on Article 53(1) TFEU. The extent of harmonisation, which goes far beyond the minimum harmonisation approach taken in 1994, when the Directive entered into force, is the only measure achieving the objective of protecting depositors, ensuring financial stability and enhancing the Internal Market since the minimum harmonisation approach has failed in the recent crisis. This has been acknowledged by the ECOFIN Council of October 2008 and Article 12 of Directive 1994/19/EC as amended by Directive 2009/14/EC, according to which a far-reaching review was necessary.[63]

Recital 17 of Directive 2009/14/EC and Recitals (not numbered) of Directive 94/19/EC.

6. OBJECTIVES

The overarching objectives of the revision of the DGS Directive are identical with the objectives enshrined in the Directive: maintaining financial stability by strengthening depositor confidence and protecting their wealth. The pursuit of these objectives is driven by the need to enhance the Internal Market, which lies at the heart of the Directive. The following general objectives result from the recitals of the Directive and the Treaty A general discussion of whether DGS as such induce moral hazard is not part of this impact assessment. This general question has been decided when DGS were introduced by Community legislation in 1994. Adverse selection from the perspective of banks, however, is addressed in Sections 4.4 and 7.9. More specifically, there is no moral hazard for banks since DGS are only triggered if they are closed and DGS offer thus no incentives in this regard. Moreover, from the perspective of depositors moral hazard is not discussed either since co-insurance, a portion of losses to be borne by depositors, has been abandoned by Directive 2009/14/EC and it cannot be assumed that depositors can assess the solidity of banks or that banks offering more than a certain interest rate have to be considered unstable. Supervision is the task of the competent authorities. :[64]

A general discussion of whether DGS as such induce moral hazard is not part of this impact assessment. This general question has been decided when DGS were introduced by Community legislation in 1994. Adverse selection from the perspective of banks, however, is addressed in Sections 4.4 and 7.9. More specifically, there is no moral hazard for banks since DGS are only triggered if they are closed and DGS offer thus no incentives in this regard. Moreover, from the perspective of depositors moral hazard is not discussed either since co-insurance, a portion of losses to be borne by depositors, has been abandoned by Directive 2009/14/EC and it cannot be assumed that depositors can assess the solidity of banks or that banks offering more than a certain interest rate have to be considered unstable. Supervision is the task of the competent authorities.

· protecting a portion of depositor wealth in order to avoid bank runs, personal hardship and stress for social welfare systems;

· ensuring financial stability by strengthening depositor confidence and a more effective supervision and resolution of cross-border banks;

· enhancing the Internal Market:

– ensuring a level playing field between banks wherever headquartered in the EU;

– allowing banks to choose the way of providing cross-border services (i.e. via direct operations in another Member State, branch or subsidiary) without restraints concerning the DGS regime.

Last but not least, it should be noted that the review maintains the principle set out in the recitals of the Directive that banks, not taxpayers, should in principle finance DGS. Therefore, this impact assessment does not deal with fiscal support for DGS The Directive does not distinguish between systemic crises and 'normal times' and it is not intended to change this approach. Were it changed , depositors would have no confidence since they would be implicitly told that their deposits were not safe in a systemic crisis. The Directive could then not achieve its goal to prevent bank runs. .[65]

The Directive does not distinguish between systemic crises and 'normal times' and it is not intended to change this approach. Were it changed , depositors would have no confidence since they would be implicitly told that their deposits were not safe in a systemic crisis. The Directive could then not achieve its goal to prevent bank runs.

The table below shows the hierarchy of the objectives (from general to operational) applicable to specific issues.

Table 1 : General, specific and operational objectives |

Problem drivers|Specific problems stemming from the problem drivers|Operational objectives|Specific objectives|General objec-tives|

1|Differences in and appropriateness of the level and scope of coverage|If depositors feel that a significant part of their deposits is not covered, they will run on their banks. Differences lead to complex topping up arrangements and long payout delays in cross-border situations. Potential depositors may not choose the best product but the most comprehensive scheme, potentially distorting competition and limiting the benefits of the Internal Market.|Ensure that deposits are covered to the highest economically feasible and cost-efficient extent also in relation to the potential number of bank failures. Reduce differences in the level and scope of coverage. Provide alternative solutions to the current ‘topping up’ regime.|Determine the appropriate coverage level. Provide for level playing field and enhanced product selection. Simplify arrangements applicable in cross-border situations|Strengthen depositor confidence - Enhance financial stability - Protect a part of depositors' wealth – Enhance the Internal Market|

2|Inadequate payout procedures|If depositors have the choice to withdraw their deposits before the DGS is triggered or to wait several weeks after the DGS steps in, they will run on their banks in order to get money for the food, bills etc.|Ensure clear and fair payout modalities. Ensure that DGS are capable to deal with payout situations. Involve DGS at an early stage. Improve information exchange between banks and DGS.|Reduce payout delays.||

3|Insufficient depositor information on functioning of schemes|If depositors do not know whether their deposits are protected, they will run on their banks. They may also hesitate to deposit their money at foreign banks or branches if they do not know how other schemes function.|Clarify and elaborate existing information obligations of banks.|Inform potential and existing depositors of their deposit protection conditions.||

4|DGS funding mechanisms different across the EU (ex-ante / ex-post)|Different funding mechanisms potentially distort competition. Mere ex-post funding would be pro-cyclical: it drains liquidity from banks in times of stress. Moreover, unlike in ex-ante schemes, the failed bank does not contribute to payout. |Increase convergence between DGS.|Provide for a level playing field.||

5|Level of funding of DGS: insufficient and different across the EU|If DGS have insufficient funds, depositors may not be paid out. If they are aware beforehand, depositors will lose confidence and will run on their banks. Mere ex-post funding would be pro-cyclical: it drains liquidity from banks in times of stress. Moreover, unlike in ex-ante schemes the failed bank does not contribute to the payout. |Strengthen funding mechanisms and reduce differences between them.|Enhance funding of DGS.Provide for a level playing field.||

6|Banks contributions to DGS not based on risk exposure|Lack of incentives for sound risk management may make financial system more vulnerable.|Provide for contributions to schemes which adequately reflect the degree of risk incurred by banks.|Provide incentives for sound risk management.Ensure that bank finance DGS.||

7|Limited mandate of DGS (only payout, no bank resolution)|If DGS had a broader mandate, their funds originating from the private sector could be used to support ailing banks – this may reduce the need for taxpayers' money for support measures.|Ensure adequate funding for DGS with additional tasks. Ensure that DGS with intervention powers remain sufficiently funded to fulfil their payout obligation if charged with additional tasks.|Facilitate private sector solutions in crisis situations.||

8|Lack of cross-border cooperation between DGS|High degree of fragmentation may mean that DGS with fewer resources would be hit more by a big failure than a DGS with more resources. This is aggravated by the lack of mutual borrowing between schemes across the EU. As a result the taxpayer might have to step in if a DGS has insufficient financial resources.|Provide for a solution which would make the schemes cooperate effectively.|Protect depositor and taxpayer welfare regardless where in the EU deposits and their holders are located.||

9|Mutual and voluntary schemes exempted from DGS |Depositors would not be covered if a mutual system collapses. Letting these schemes further advertising an ‘unlimited protection’ could lead to competitive distortions if from end-2010 all DGS are prohibited to increase their coverage levels above