Commission staff working document - Summary of the 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) 834
Date: 2010-07-12
Institutions: European Commission
Subjects: bank deposit, banking, credit guarantee, credit institution, financial institution, impact study, management audit

EN 

EN 

   EN 

 
 
EUROPEAN COMMISSION 

Brussels, 12.7.2010 
SEC(2010) 835 final 

COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE 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) 834 

EN 

   EN 

 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
COMMISSION STAFF WORKING DOCUMENT 

SUMMARY OF THE 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 

EN 

2 

   EN 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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. Since 1994, Directive 94/19/EC on Deposit Guarantee Schemes (DGS) has ensured that 
all  EU  Member  States  have  in  place  a  safety  net  for  depositors.  If  a  bank  is  closed,  DGS 
reimburse depositors up to a certain coverage level. The current DGS system is fragmented: 
there are about 40 DGS in the EU, which cover different groups of depositors and deposits up 
to  different  coverage  levels,  and  impose  different  financial obligations  on  banks.  Moreover, 
the schemes have proved to be underfinanced in times of financial stress. 

The  shortcomings  of  this  fragmented  system  prompted  the  European  Parliament  and  the 
Council  to  request  a  comprehensive  review  of  the  DGS  Directive.  This  review  is  part  of  a 
package  on  compensation  schemes  in  the  financial  sector  consisting  of  DGS,  insurance 
guarantee schemes, and investor compensation schemes. 

2. 

PROBLEM DEFINITION 

2.1. 

Differences in the level and scope of coverage 

The ‘minimum harmonisation’ approach adopted in Directive 94/19/EC has resulted in very 
 50 000  in  some  Member  States  to 
different  coverage  levels  in  the  EU  (ranging  from  €
 103 291 in Italy). On the one hand, in the recent financial crisis, uncoordinated increases in 
the  coverage  levels  across  the  EU  led  to  depositors  quickly  shifting  money  to  banks  in 
countries  where  deposit  guarantees  were  higher,  draining  liquidity  from  banks  in  times  of 
stress.  On  the  other  hand,  in  times  of  stability,  in  a  fragmented  market  depositors  may  still 
choose  the  highest  deposit  protection  rather  than  the  best  product,  potentially  distorting 
competition in the Internal Market. 

Currently,  Member  States  can  exclude  protection  for  many  types  of  depositors.  This  is 
particularly important for 20 million small and medium-sized enterprises (SME), representing 
99.8 % of all enterprises in the EU, whose confidence is crucial for financial stability. There 
are also considerable differences in the scope of deposits covered by DGS (e.g. with regard to 
deposits  in  non-EU  currencies,  structured  products  and  debt  certificates).  Time-consuming 
verification of eligibility may also delay payout. 

2.2. 

Inadequate payout procedures and depositor information 

Currently, depositors must be paid out within three months after a bank failure. From the end 
of 2010, this time limit has to be reduced to four to six weeks. Such a time limit might still 
lead to runs on banks since many depositors would not have sufficient funds to pay for their 
usual expenses (food, bills, etc.) for more than a few days. 

Any  difficulty  before  and  during  the  payout  process  (including  the  lack  of  proper  depositor 
information) undermines depositor confidence. Depositors may also hesitate to deposit money 
in other Member States if they do not know how other DGS work or deal with payout. 

EN 

3 

   EN 

 
€
Another  problematic  issue  is  the  option  of  setting  off  deposits  against  the  depositor’s  due 
liabilities  (e.g.  mortgage  instalments) at the  same bank or making counterclaims against the 
depositor (e.g. for the entire mortgage loan), which is currently allowed in 22 Member States. 
This may reduce or, in extreme cases, eliminate any payout from a DGS. Depositors may thus 
cause a run on their banks to get their deposits in full. Moreover, determining liabilities and 
matching them with deposits is time-consuming and likely to delay payout. 

2.3. 

Inappropriate financing of DGS 

Currently, in 21 Member States, bank contributions are paid in advance on a regular basis (ex 
ante), but in six Member States, banks only contribute after a failure (ex post). The maximum 
resources available to DGS range between €  27 million and € 8.1 billio n while the amount of 
covered deposits in the EU is about € 5.7 tr illion. As a result, some DGS are underfinanced 
and  would  not  be  able  to  deal  even  with  a  medium-sized  bank  failure.  If  DGS  have 
insufficient funds, depositors might be paid out after a long delay or not be paid out at all. 

Mere  ex-post  funding  is  very  pro-cyclical  since  it  drains  liquidity  from  banks  in  times  of 
stress which might have negative consequences for the economy (limiting the supply of credit 
by banks). Moreover, banks that do not pay ex-ante contributions are able to generate returns 
on  those  funds,  and  this  constitutes  a  competitive  advantage  vis-à-vis  their  competitors  in 
Member States with ex-ante funded DGS. 

In addition, risks incurred by banks are not taken into account when calculating contributions. 
This  may  be  perceived  by  risk-averse  banks  as  a  competitive  disadvantage  and  as  a 
disincentive  to  sound  risk  management.  This  may  also  make  the  financial  system  more 
vulnerable and induce adverse selection. 

2.4. 

Limited cross-border cooperation between DGS 

The fragmentation across the EU leads to uneven distribution of risk, in such a way that DGS 
with fewer resources would be hit harder by a bank failure than a DGS with more resources; 
this is aggravated by the lack of solidarity between schemes. Taxpayers would thus have to 
step in if a DGS had insufficient financial resources. 

Banking supervisors usually decide whether a bank should be saved or the DGS be triggered. 
Thus,  the  fragmentation  of  DGS  does  not  provide  incentives  for  supervisors  to  reach  a 
solution in the interest of all depositors of a banking group and to take account of the potential 
impact on financial stability in all Member States involved. 

2.5. 

Limited mandate of DGS 

The powers to manage bank crises are split between various domestic authorities (supervisors, 
central  banks,  governments,  judicial  authorities,  and  —  in  11  Member  States  —  DGS)  and 
differ according to national systems. This makes cross-border bank resolution inefficient. The 
payout funds of DGS with a bank resolution mandate are not ring-fenced against being used 
for  bank  resolution  purposes.  This  may  impede  their  primary  function  of  providing  quick 
payout of deposits in the event of a bank failure. 

Currently, mutual and voluntary DGS are exempt from the Directive. Depositors often have 
no  claim  against  such  schemes,  which  may  make  them  vulnerable  if  such  schemes  cannot 
cope with a failure and the failed bank is not a member of a DGS governed by the Directive. 

EN 

4 

   EN 

 
3. 

SUBSIDIARITY 

Only EU action can ensure that banks operating in more than one Member State are subject to 
similar  requirements  concerning  DGS,  ensuring  a  level  playing  field,  avoiding  unwarranted 
compliance  costs  for  cross-border  activities  and  thereby  promoting  further  Single  Market 
integration. Harmonisation in many areas (e.g. coverage, payout, funding) cannot be achieved 
by Member States alone because it requires the harmonisation of many different rules existing 
in the national legal systems and can therefore better be achieved at EU level. This has been 
acknowledged in the DGS Directives1. 

4. 

OBJECTIVES 

The  overarching  objectives  enshrined  in  the  Directive  are  to  maintain  financial  stability  by 
preventing  bank  runs  and  to  protect  depositors’  wealth.  In  addition,  the  principles  of  the 
Internal Market, such as ensuring a level playing field between EU banks, must be upheld and 
banks’ freedom to decide whether they want to operate directly in another Member State or 
establish branches or subsidiaries must remain unaffected. 

5. 

PREFERRED POLICY OPTIONS AND THEIR EXPECTED IMPACT 

Given  that  minimum  harmonisation  has  proved  to  be  ineffective  as  a  way  of  protecting 
depositors’  wealth  and  inconsistent  with  the  Treaty  objective  of  ensuring  the  proper 
functioning of the Internal Market, the approach of maximum harmonisation has been chosen, 
so as to create a level playing field for all Member States. 

5.1. 

Level and scope of coverage 

 100 000 to be applied in all 
Maintaining the current approach, i.e. the fixed coverage level of €
Member States from the end of 2010, as compared with lowering or increasing the coverage 
level,  would  ensure  substantial  progress  in  terms  of  increased  deposit  protection  without 
disproportionably increasing costs for banks and depositors. In comparison with the pre-crisis 
period,  it  would  increase  the  amount  of  covered  deposits  from  61%  to  72%  of  eligible 
deposits and  the  number  of  fully  covered  deposits  from  89% to 95%  of eligible deposits. It 
 100 000  is  the  optimal  solution;  the  cost-efficiency  benefits  of 
seems  that  the  level  of  €
adopting a coverage level higher than €

 100 000 are very limited.  

However, taking into account an appropriate coverage for certain life events and the current 
house prices, it might be justified to consider a higher coverage level for so-called temporary 
high deposit balances stemming from some specific life events and real estate transactions. At 
the same time, exemptions from the fixed coverage level might impede a smooth and timely 
payout process. It might also affect the Internal Market if depositors choose the bank with the 
best deposit protection but not the most suitable product. This risks could be mitigated if the 
coverage of such deposits was limited to a certain time period. 

As to the eligibility of depositors, full harmonisation of the scope of coverage has turned out 
to be the most effective solution to create a level playing field. Excluding financial institutions 
would  take  into  account  the  insignificance  of  the  amount  covered  for  them.  Excluding 

1 

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

EN 

5 

   EN 

 
                                                 
authorities  seems  cost-efficient,  since  they  have  easy  access  to  other  financial  resources. 
Covering  the  deposits  of  all  enterprises  (i.e.  including  the  remaining  1.3%  of  enterprises  in 
addition to the small and microenterprises now covered, which account for 98.7% of all EU 
enterprises) would save considerable resources and the time needed for verifying the size of 
businesses  during  payout  proceedings.  It  would  thus  considerably  speed  up  payout  and 
increase depositors’ confidence in DGS. 

Deposits in non-EU currencies should be covered by DGS — in contrast to debt certificates 
and  structured  products  not  repayable  in  full.  This  would  avoid  favouring  banks  as  bond 
issuers over non-bank issuers. It would also reduce payout delay and the administrative cost 
of verifying eligibility, while only moderately increasing bank contributions to DGS. 

5.2. 

Payout deadline, modalities and depositor information 

In order to maintain depositors’ confidence and avoid bank runs, the payout deadline needs to 
be substantially reduced — preferably to seven calendar days (after a transition period). Such 
a short payout deadline would only be feasible under several conditions, i.e. imposing some 
obligations on supervisors (involving DGS at an early stage by compulsorily informing them 
if  a  bank  failure  becomes  likely),  DGS  (making  payouts  by  DGS  on  their  initiative  without 
being  prompted  by  applications  from  depositors)  and  banks  (tagging  eligible  deposits, 
providing  single  customer  views).  The  latter  would  entail  one-off  administrative  costs  EU-
wide  of  about  €
 1.2  billion  annually  within  five  years.  They  would  be  more  than 
counterbalanced by a gain in depositors’ confidence that would reduce the probability of bank 
runs and contribute to financial stability. If eligibility criteria were radically simplified, those 
costs could be considerably reduced.  

As  regards  payout  modalities,  discontinuing  set-off  would  persuade  depositors  with  high 
liabilities not to cause a run on their banks. It would also be effective in reducing payout time. 

Only depositors that have been properly informed about key aspects of deposit protection (the 
level/scope of coverage, payout deadline, DGS contact details, etc.) can be confident in DGS. 
This  would  be  ensured  by  means  of  a  template  to  be  countersigned  by  a  depositor  before 
depositing money in a bank and by a mandatory reference to DGS in account statements and 
advertisements, if a product is covered. The cost of such operations is deemed insignificant. 

Regular  disclosure  of  information  by  DGS  (e.g.  ex-ante  funds,  ex-post  capacity,  results  of 
regular stress testing) would ensure transparency and credibility at insignificant cost. 

5.3. 

Funding mechanisms and levels 

Ex-ante funding is much more efficient because of its counter-cyclical nature (it imposes most 
costs  on  banks  in  good  times)  and  it  should  be  dominant  (e.g.  ¾  of  the  total  fund)  and 
supported  by  ex-post  funds  to  be  collected  if  necessary  (e.g.  ¼  of  the  fund).  Borrowing  by 
DGS should be allowed but not necessarily harmonised.  

Setting a target level for DGS funds would ensure that schemes are credible and capable of 
dealing  with  medium-sized  bank  failures.  The  most  cost-efficient  target  level  for  total  DGS 
funds would be 2% of eligible deposits — to be achieved within 10 years. After this period of 
time, DGS in the EU would be much better financed than they are now. They would collect 
 50  billion  of  ex-post 
about  €
 23 billion in 2008). 
contributions if needed (compared to total ex-ante and ex-post funds of €

 150  billion  in  ex-ante  contributions  and  could  call  for  €

EN 

6 

   EN 

 
It would require bank contributions to DGS some four or five times higher than at present and 
would reduce banks’ profits by about 2.5% in normal times. For depositors, it would mean a 
maximum  reduction  in  interest  rates  on  savings  of  less  than  0.1%  or  increasing  current 
account fees of less than €
 7 per year per account. This scenario would be more cost-efficient 
than the other scenarios analysed, since a much higher target level (enough to cover a failure 
of  one  of  the  10  largest  banks  in  a  Member  State)  would  likely  lead  to  a  30%  decrease  in 
banks’  profitability  (or  even  more  than  40%  in  a  crisis  situation).  It  would  also  be  a  more 
effective option since a lower target level (based on an average DGS payout) would not allow 
schemes to cover medium-sized bank failures. 

Moreover,  a  more  harmonised  approach  to  bank  contributions,  consisting  of  risk-based 
elements, would help better reflect the risk profiles of individual banks and provide incentives 
to operate under a less risky business model. Developing a set of core indicators mandatory 
for all Member States and another set of optional supplementary indicators would introduce 
such harmonisation gradually, avoiding sudden adaptation costs. 

5.4. 

The mandate of DGS 

An effective and cost-efficient solution to ensure that DGS funds cannot be drained for bank 
resolution measures to the benefit of uninsured creditors is to require that DGS funds should 
principally be used for paying out depositors. However, in order not to deprive depositors of 
the  benefits  of  bank  resolution  measures  (e.g.  the  transfer  of  deposits  to  a  healthy  bank),  it 
would be effective to allow the use of DGS funds for resolution only up to the amount that 
would have been necessary to pay out covered deposits. To a limited extent, Member States 
could  also  allow  DGS  to  use  their  financial  means  in  order  to  avoid  a  bank  failure  without 
being restricted to financing the transfer of deposits. If DGS had an even broader mandate, i.e. 
including not only bank resolution but also early intervention measures (e.g. recapitalization, 
liquidity  assistance,  guarantees,  etc.),  they  would  need  to  be  adequately  funded.  This  is 
because  bank  resolution  is  alternative  to  payout  while  early  intervention  does  not  always 
prevent payout later on. However, in order to avoid situations where DGS funds could serve 
as an important contribution to an otherwise difficult early intervention measure, they could 
be used for such purposes under some restrictions. 

A more effective solution would be to ring-fence DGS against any use for other purposes than 
payout and to require that all DGS would have to be equipped with sufficient funds for this 
 121 
role.  However,  this  solution  would  not  be  cost-efficient.  It  would  cost  banks  between  €
billion and €
 352 billion and it is unclear whether this would be compensated by benefits in 
terms  of  depositor  confidence  and  financial  stability.  Moreover,  this  option  would  seem 
inconsistent  with  ongoing  Commission  work  on  bank  resolution  to  prescribe  a  mandatory 
bank resolution mandate for all DGS. 

The  integration  of  mutual  and  voluntary  guarantee  schemes  under  DGS  would  effectively 
ensure that bank depositors adhering to such schemes enjoy the same rights and have the same 
confidence as other depositors. It is estimated that the cost to banks would be outweighed by 
the benefits of boosting depositor confidence. 

5.5. 

Cross-border cooperation between DGS and a pan-EU DGS 

In  order  to  facilitate  payout  in  cross-border  situations,  host-country  DGS  should  act  as  a 
single  point  of  contact  for  depositors  at  branches  in  another  Member  State.  They  would 
provide  depositors  with  information  in  the  host  country’s  language.  The  host-country  DGS 

EN 

7 

   EN 

 
should act as a post box and a paying agent for the home-country DGS. Administrative costs 
for the former would be marginal in comparison with the gain in depositor confidence. 

Another  option  to  improve  cross-border  cooperation  among  DGS  would  be  setting  up  a 
network (an ‘EU system of DGS’) and introducing a mutual borrowing facility. This would 
mean that if the financial capacity of one DGS became depleted, it could borrow money from 
the other schemes. In order to allow an additional facility of 0.5% of eligible deposits for the 
borrowing scheme (i.e. the equivalent of ex-post  contributions  referred to under Section 5.3 
— one quarter of 2%), all DGS would only have to lend up to 0.08% of eligible deposits, i.e. 
about 1/25 of their funds at target level. This is effective and efficient. 

This  could  be  considered  the  first  step  towards  establishing  a  single  pan-EU  DGS  in  the 
future, which would save administrative costs of roughly EUR 40 million per year. This idea 
seems to be economically the most effective solution to the fragmentation of the DGS market, 
but there are some legal issues that have to be further investigated. The idea of a pan-EU DGS 
is  a  longer-term  project  and  should  be  in  line  with  developments  and  progress  on  the  new 
supervisory architecture in the EU and developments in the field of bank resolution. 

5.6. 

Overall impact on stakeholders 

The main benefit of the above policy options is that depositors’ confidence is expected to be 
significantly enhanced by a higher level of coverage, faster payout, sound DGS funding, etc. 
It  will  make  depositors  confident  that  their  deposits  are  safe  and  they  will  get  back  up  to 
 100 000,  even  if  their  bank  fails.  It  would  inevitably  involve  substantially  higher  bank 
contributions  which,  in  turn,  reduce  bank  operating  profits,  but  this  is  a  basic  condition  of 
having sufficiently funded DGS in place. The cumulative impact on banks stemming from the 
preferred policy options on the level and scope of coverage, the harmonised approach to DGS 
funding and faster payout would be the following: an average 4% decrease in bank operating 
profits at EU level during the first five years, and a 2.5% decrease in the remaining five years 
(or 7.5% and 6% respectively in a crisis situation when ex-post contributions are collected as 
well).  Some  banks  may  try  to  pass  those  costs  on  to  depositors  but  even  in  the  worst  case 
(assuming all bank costs are passed on to depositors, which is rather unlikely in a competitive 
environment), the overall impact during the ten years should not exceed a 0.1% reduction in 
 7 
interest rates on saving accounts or an increase of bank fees on current accounts by about €
per year per account (or €
 10-12 in a crisis situation). Depositors will benefit from increased 
competition  as  a  result  of  a  level  playing  field  and  all  stakeholders  will  benefit  from  the 
overall financial stability to which the proposed DGS reform is expected to contribute. 

6. 

MONITORING AND EVALUATION 

The  transposition  of  any  new  EU  legislation  on  DGS  will  be  monitored  under  the  Treaty. 
Since bank failures are unpredictable, the functioning of DGS cannot be regularly monitored 
on  the  basis  of  how  real  bank  failures  are  handled.  However,  regular  stress  tests  of  DGS 
would  show  whether  they  are,  at  least  in  an  exercise  scenario,  capable  of  complying  with 
legislative  requirements.  This  could  be  done  as  part  of  a  peer  review  conducted  by  the 
European Forum of Deposit Insurers (EFDI) and the proposed European Banking Authority 
(EBA)2. 

2 

See COM(2009) 501. 

EN 

8 

   EN 

 
€