Report from the Commission on the operation of the "topping-up" provision, Article 4, paragraphs 2-5 of the Directive on Deposit Guarantee Schemes (94/19/EC)
Date: 2001-10-18
Institutions: European Commission
Subjects: bank deposit, banking, credit guarantee, credit institution, financial institution, management audit

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 18.10.2001
COM(2001) 595 final

REPORT FROM THE COMMISSION

on the operation of the "topping-up" provision, Article 4, paragraphs 2-5 of the
Directive on Deposit Guarantee Schemes (94/19/EC)

1.

INTRODUCTION

The Directive on deposit guarantee schemes (94/19/EC) lays out a minimum level of
harmonisation for deposit guarantees in EU Member States. Its main objective is to increase
the stability of the banking system and to protect depositors.

The principles of home country control and mutual recognition are cornerstones in this
is generally in the EU financial legislation. The guarantee of the parent
directive as it
institution is therefore also valid for its branches in other Member States. The result is that a
branch of an EU credit institution, which is established in another Member State, may well
offer a guarantee that is higher or lower compared to the level stipulated by the national law
of the host Member State.

Generally, only the stipulated minimum requirements are subject to Community legislation.
However, in the area of deposit guarantees, the directive actually goes a step further. In
Article 4, paragraph 2, the Directive stipulates that host Member States having a guarantee
above the minimum, must ensure that their guarantee schemes can offer a supplementary
guarantee to those foreign EU-branches that would request it. This enables a foreign branch
that has a lower guarantee than the one prevailing in its host state to complement its home
guarantee to the level and scope of its host state. This paragraph is often called the “topping-
up” clause.

The Directive stipulates that the Commission should report on the operation of paragraphs 2,
3 and 4, which draw up the provision for the supplementary cover. The Commission is also
requested, if appropriate, to propose amendments to these paragraphs. The 13th recital of the
preamble of the Directive gives further guidance on the purpose of the requested report. It
states that the Commission should report on the extent to which branches have made use of
this option and the difficulties they have encountered in implementing these provisions.
Furthermore, it should not be ruled out that home Member State schemes should themselves
offer such a complementary cover, subject to the conditions such schemes may lay down.

The objective of this report is to respond to the request in the Directive as regards the
Commission’s obligation to report on the operation of the topping-up paragraphs.

2.

THE REQUIREMENT TO OFFER SUPPLEMENTARY COVER

Article 4(2) of Directive 94/19/EC stipulates that

“Where the level and/or scope, including the percentage, of cover offered by the host Member
State guarantee scheme exceeds the level and/or the scope of cover provided in the Member
State in which a credit institution is authorised, the host Member State shall ensure that there
is an officially recognised deposit guarantee scheme within its territory which a branch may
join voluntarily in order to supplement the guarantee which its depositors already enjoy by
virtue of its membership of its home Member State scheme.”

Consequently, as soon as a Member State has a deposit guarantee exceeding the minimum
requirements stipulated by the Directive,
is required to ensure that a supplementary
guarantee can be offered to those foreign branches that would wish to improve their cover.
The minimum requirements are given by the directive as follows:

it

– deposits are guaranteed up to an amount of

€

20,000 from the beginning of the year 2000,

2

– the minimum percentage cover amounts to 90% of deposits - up to the minimum guarantee

€

level of

20,000,

– the minimum scope is defined by a list of possible exemptions in Annex I to the Directive.

Several Member States apply the minimum level and the minimum percentage cover.
However, none of these Member States limits its deposit guarantee to the minimum scope,
using all the exemptions in Annex I of the Directive. In practice, therefore, all Member States
are obliged to offer a supplementary deposit guarantee for branches from other Member
States. According to their reports, all Member States have formally transposed a provision in
their legislation which oblige them to offer topping-up facilities to those foreign branches that
would request to supplement their cover.

3.

PRESENT USE OF THE TOPPING-UP PROVISIONS WITHIN THE EUROPEAN UNION

A topping up agreement is a contract between two parties; a credit institution with a branch in
another Member State and a deposit guarantee scheme established in the host country of that
branch. The contract stipulates the agreed conditions whereby the host country guarantee
scheme undertakes to deliver a supplementary deposit guarantee to the foreign branch that
would supplement its home country deposit guarantee.

As shown in the table in the annex of this report, only the Danish and the British deposit
guarantee schemes have so far concluded topping up agreements with EEA-branches
operating within their territory. No Member State has made any pay-outs under topping up
agreements.

The topping up provision is a derogation of the general principle of home country control.
The low interest by credit institutions to use it should therefore not come as a surprise. There
are also other explanations for the low interest in topping up. One such factor, which has been
mentioned by several Member States, is that there now exists a minimum guarantee level and
scope for deposit guarantees in all Member States implying that deposit guarantee conditions
have converged within the EU. This has reduced the need for supplementary cover. Presently
a majority of Member States have compulsory deposit guarantees amounting to between
€
20 000 -
40,000), France
€
the German voluntary schemes also offer
(
70,000) and Italy (
supplementary cover. Among the EEA-countries which are not Member States, Norway
€
offers a substantially higher guarantee than the minimum, amounting to

25 000. Only three Member States offer higher levels: Denmark (

104,000). In addition,

250,000.

€

€

€

The fact that most retail banking business is conducted by locally authorised subsidiaries of
EU credit institutions is also important. It means that the number of branches doing retail
business in other Member States is relatively low which also reduces the need for topping up.

It is also evident that credit institutions do not consider the guarantee as important for their
competitiveness. At least not important enough to outweigh its additional cost. Low public
awareness about the differences among deposit guarantees and the fact that the market has
been characterised by financial stability have also been mentioned by Member States as
factors explaining why competitiveness is not at stake. Moreover it is argued that some of the
major banks rely on their reputation to attract business in the host state and therefore their
branches do not need to use the topping up facility to attract deposits in other Member States.
Finally,
information requirements from host countries or
confidentiality concerns may have reduced the demand for topping up.

in a few cases additional

3

4.

BILATERAL AGREEMENTS BETWEEN DEPOSIT GUARANTEE SCHEMES

Annex II of the Directive stipulates that the home and the host deposit guarantee schemes
shall conclude a bilateral agreement as soon as a branch from another Member State has
applied for topping up. The aim of such an agreement is to establish appropriate rules and
procedures between the schemes for paying compensation to depositors since both schemes
would be responsible for pay-outs in the event of an insured institution’s inability to fulfil its
obligations towards its depositors.

So far only three bilateral agreements have been concluded between deposit guarantee
schemes. One of these agreements was concluded even if it did not exist any topping up
agreement between the countries. The parties of the three existing agreements are the deposit
guarantee schemes in Ireland and UK, Denmark and Sweden, and Luxembourg and Sweden
respectively. All these agreements are rather general in nature and basically follow the
guiding principles stipulated by the Directive, e.g.
they set out principles for mutual
information exchange and limit the responsibility of each scheme to the basic (home-country)
or complementary (host-country) deposit insurance respectively.

The opinion of the importance of concluding bilateral agreements between deposit guarantee
schemes vary among Member States. Those that are most proactive argue that agreements
between schemes should be concluded as soon as a Member State credit institution has
established a branch in another EU country, even if this branch has not asked for any topping
up agreement with its host country scheme. According to this view such an agreement should
set out the principles for co-operation between the two schemes also in a situation when the
branch was only to use its home-based guarantee for pay-outs to depositors of the host-
country. However, a majority of Member States supports the current provision in the
Directive implying that there is only a need to set up a bilateral agreement once a topping up
agreement has been concluded. They argue that such an agreement is likely to facilitate a
prompt pay-out from the schemes. Finally, there are also Member States which hold the view
that each situation of pay-out is so specific and that a generally stated bilateral agreement does
not make any substantial difference for facilitating crisis management.

Member States have also been asked to consider whether the guiding principles in Annex II of
the Directive should be revised. Clearly a majority of Member States prefer that the guiding
nature of the principles is maintained. They do not see any need to elaborate the principles
into a EU model topping up agreement, because every pay-out situation differs substantially,
not at least as a result of the different guarantee systems involved. On the other hand some
Member States mention areas to which the guiding principles could be extended e.g. to clarify
that it is the host-country that should take the initiative to conclude an agreement, to specify
whether the gross or net remuneration principle should be applied, to specify rules and
procedures governing the exchange of information between the schemes, to determine the
contributions to be paid by the foreign branches as well as to determine the cost attributable to
each fund. However, as long as the demand for and experience of topping up are so limited, a
major revision of the principles for bilateral agreements is not considered as a priority.

5.

OBJECTIVE CONDITIONS

Article 4(3) of the Deposit Guarantee Scheme directive stipulates that Member States shall
ensure that objective and generally applied conditions are established for branches’
membership of a host Member State’s scheme. Hitherto Member States have not mentioned

4

that the branches of their credit institutions have experienced any discrimination in this
respect.

It might be worth noting that the existence of “equal conditions” is problematic to verify. The
reason is that in several Member States topping up agreements have never been concluded nor
have the theoretical topping up conditions been defined. The topping up clause has thus only
been transposed into national legislation. The specific conditions have not been drafted since
there has never been any topping up request. Several Member States also judge it as unlikely
that they will ever receive such a request since both the scope and the level of their national
deposit guarantee are similar to the Directive’s minimum requirements.

6.

POSSIBLE CONCERNS

Generally, Member States regard the topping up as a facility offered to them by the host-state
of their branch. The only concern that has been expressed by some Member States in relation
to topping up is that information requirements which have been imposed by the host state
scheme have actually, in a few cases, negatively affected the interest for topping up by foreign
branches. Such additional information requirements have not only been perceived as a burden
or an additional cost. Since the requested information do not solely relate to the foreign
branch, but also to its parent institution, the concerns have also included confidentiality
aspects.

7.

CHANGING CONDITIONS AFFECTING TOPPING UP

The topping up provision was introduced to make it possible for foreign branches to offer an
identical guarantee to those offered by domestic institutions in the host market. The
possibility to top up was considered important for competitive reasons at the time of the
introduction of the directive, since the level and scope of the deposit guarantees then differed
substantially among countries. Since then, several changes in the market have occurred. They
may have affected the need for and the functioning of the topping up provision.

Among the most important changes affecting the need for topping up are the convergence of
guarantee levels within Member States, the planned enlargement of the EU (which, during a
transitional period, is likely result in a divergence of EU guarantee levels) and the expiry of
the export prohibition1 clause. The expiry of the latter provision implies that the national
guarantee no longer necessarily represents the best guarantee within a single country. A
branch from another Member State may offer better conditions. As a result, the topping up
instrument cannot any longer be used as an instrument to achieve a homogeneous degree of
protection within a single Member State. It can only match the conditions of the legally
stipulated national deposit guarantee.

8.

IS THERE A NEED FOR A SUPPLEMENTARY GUARANTEE?

The preface of the Directive requests the Commission to, if appropriate, propose amendments
as regards the topping up clause. In particular it states that it should not be ruled out that home

1

The export prohibition clause refers to Art. 4(1) of Directive 94/19/EC which expired at the end of
1999. See also Commission report COM(1999)722 on the export prohibition clause.

5

Member State schemes should themselves offer a complementary cover. The Commission
considers that the major options are the following:

• to maintain the present host based topping up provision,

• to change the responsibilities for topping up to rest with the home Member State,

• to repeal the existing topping up provision.

8.1.

Maintain the present host country topping up provision

The present topping up provision in the Directive is based on a responsibility for the host
Member State guarantee system to offer a supplementary guarantee up to the level of the host
country guarantee as stipulated in national law.

A general argument for keeping the topping up provision in the years to come is that such a
provision might be especially important during the enlargement process of the European
Union. After accession it is possible that some of the present candidate countries will be
allowed, during a transitory period, to offer lower national deposit guarantee levels than what
is stipulated in the directive. In that event,
it seems particularly important for credit
institutions from these candidate countries, which might be interested in setting up branches
in the present EU-area, to have the possibility/obligation to at least fulfil the minimum
requirements of the Member States. A host-based scheme seems to be the only viable
alternative that could fulfil this objective.

It is also clear that regardless of the requirements stipulated by an EU Directive, host-based
schemes will continue to exist in most Member States since third country branches, which
want to start operating in Member States, normally are required to supplement their cover to
the national level. A host-based scheme also seems to be the logical way of organising
supplementary cover when the need to top up is concentrated to a few host Member States.
Finally, at this point in time, there might not be an interest to undertake a major revision of
the topping up provision, which may cause more administrative work than its current use
justifies.

On the negative side of the balance the present topping up provision has gradually become
the previous
less efficient as a competitive instrument. As has been mentioned before,
uniform national guarantee is now challenged by the existence of a wider variety of
guarantees existing side-by-side within the same country. A host-based topping up system,
which is linked to the national guarantee level, can never match the maximum level offered in
the market but is limited to match the stipulated level according to national provisions.

8.2.

Change the responsibility for topping up to rest with the home Member State

One option to the present host-based approach for topping up, as indicated in the preamble to
the Directive, is to replace it with a home-based supplementary guarantee.

One attractive feature of a home-based system is that credit institutions would not be obliged
to hand over any sensitive information to a foreign deposit guarantee scheme if they requested
topping up. A home-based scheme would mean that the supplementary guarantee of the
branch would rest within the same scheme as their basic guarantee and this scheme would
therefore already have access to all relevant information. Such an organisation could therefore
have economical benefits and could also reduce potential concerns regarding confidentiality.

6

As regards the possible arguments against a home based scheme,
this option is more
demanding than the host-based option for new Member States wanting to establish their
foreign branches within the present EU Member States. Lastly, it seems that the present low
demand for complementary cover makes it doubtful whether a major revision of the topping
up clause is worthwhile. There is no clear evidence that a home-based guarantee would be
more attractive than the present, host-based system. Indeed, most credit institutions seem to
consider that they do not need any complementary deposit insurance at all for their foreign
branches.

8.3.

Repeal the topping up provision

The third option is to repeal the topping up provision in the Directive. However, needless to
say, there would still exist a possibility to set up supplementary deposit guarantee schemes on
a voluntary basis.

The low interest among EU credit institutions for subscribing to complementary deposit
guarantees might indicate that there is no need for maintaining a topping up provision in the
Directive. For those institutions that would wish to subscribe to a complementary cover one
might argue that a privately organised, home-based guarantee would suffice. Indeed, to repeal
the existing topping up provision is the option that would be most consistent with the
principles of home country control and mutual recognition applied in other areas of the Single
Market.

It seems that the major disadvantage of repealing the topping up provision is that the clause
might be useful during the enlargement process. The possibility to top up might be requested
by foreign branches to credit institutions originating from new Member States. It might also
be in the interest of the existing Member States to ensure that such a possibility exists,
especially if some of the new Member States would have lower national guarantee levels
during a transitional period than what is stipulated by the Directive.

Another reason to keep topping up in the form of a legal provision is that its importance may
instability implying increasing public
increase considerably in times of financial market
awareness of the differences between guarantees. If a situation of financial disturbance
materialised it would be vital that an accepted guarantee is available in the market.

9.

SUMMARY AND CONCLUSIONS

The demand for topping up has so far been very limited within the Union. Member States
have never made any pay-outs under such an agreement. However, one cannot therefore draw
the conclusion that the topping up provision in the Directive is not useful and that it should be
abolished.

The demand for topping up may very well change. If a situation of financial instability would
develop resulting in pay-outs under the deposit guarantee schemes, the demand for topping up
can be expected to increase.

It is also likely that the topping up provision will be a useful instrument during the transitory
period of the EU enlargement process. The topping up instrument, which offers branches to
supplement their guarantee up to the host country level, could then be essential for offering all
accession countries the possibility to establish branches within the traditional EU area, i.e.
even those countries that may be allowed to apply a lower guarantee than the EU minimum in

7

their home market during the transition. At this point in time it therefore seems premature to
propose an abolishment of the EU topping-up provision.

Regarding the organisation of the scheme, the balance of argument is clearly in favour of
keeping the current regime of host-country responsibility. An important argument is that the
availability of topping up in host countries facilitates the possible cross-border establishment
of bank branches by accession countries during the transitory period. Furthermore it is not
reasonable to propose a major revision of the topping up clause as long as there is no clear
evidence that a home-based system would be more attractive for credit institutions than the
present host-based system. Indeed, if credit institutions would find a home based system more
attractive there is nothing that prevents them from organising such a system on a voluntary
basis.

8

ANNEX

Table 1: Member States’ use of the topping-up provision, Art 4(2-5) in the Directive on
Deposit Guarantee Schemes (94/19/EC) as of 2000-12-31.

1

2

3

4

5

Host Member
State

Level of deposit
guarantee in Euros
according to national
provisions in Member
States.

Proportion of cover
within brackets (100% if
not specified)

Number of
topping up
agreements

(concluded between
the host guarantee
scheme and foreign
branches of EEA
credit institutions)

Existence of
agreements between
home and host
deposit guarantee
schemes

(Yes/No)

Nationality
of other
party in
agreements
between
home and
host country
deposit
guarantee
schemes

Belgium

20 000

Denmark

» 40 0002

Germany

20 0003, (90%)

Greece

Spain

France

Ireland

Italy

20 000

20 000

70 000

20 000, (90%)

103 291

Luxembourg

20 000

Netherlands

20 000

Austria

20 000, (90%)

Portugal

Finland

Sweden

United
Kingdom

25 000

25 000

25 000

£ 20 000, (90%)

0

1

0

0

0

0

0

0

0

0

0

0

0

0

4

No

Yes

No

No

No

No

Yes

No

Yes

No

No

No

No

Yes

Yes

-

SW

-

-

-

-

U.K.

-

SW

-

-

-

-

DK, LUX

IR

2

3

The guarantee amounts to 300,000 Danish kronor.
In addition, the German voluntary schemes offer supplementary higher cover.

9