fpmi: alterations needed in planned directive on deposit insurance
by Finanzplatz München Initiative
It was three years ago that the EC Commission made its initial proposal on the revamping of the deposit insurance directive. This work has been resumed in Brussels. The directive is to formulate specifications for the national-level systems charged with the protection of the deposits consigned by savers to banks in cases of the latter's insolvency. In-depth differences persist among the EU Parliament, EU Commission and Council.
As a basic rule, the new specifications are designed to place a ceiling of liability upon the deposits of each bank customer. This ceiling is to amount to a maximum of €100,000. The directive also foresees the setting up of pre-financed security funds in all member countries. A further part of the directive is the significant shortening of terms of disbursing funds to depositors affected by the insolvency of a bank. The directive also contains plans for a large number of new administrative requirements and of reporting obligations. Municipal Financial Center Initiative (known by its acronym in German of “fpmi”) has been investigating since its having been founded Germany and EU-wide financial topics. The Initiative sees a number of important aspects of the directive as requiring improvement.
No granting of credit among national-level deposit security systems
There is still no single, unified system of deposit security covering all of Europe. Several countries on the continent - to provide an example - refrain from collecting funds on a prior basis. Rather, they demand contributions from the financial institutions only upon the occurrence of the incidence of damage. One set of requirements on financial resources is to apply in the future to all systems of security. The Initiative hails the stipulation that the same standards are to be adhered to by all of the legally-mandated deposit insurance systems maintained in the EU's member countries. The Initiative also advocates the coexistence of legally-mandated and of voluntary systems of deposit insurance on the national level. Each of these kinds of systems is to have the same rights. Those national-level deposit insurance systems – be they institutions-based or be they the voluntary-payment deposit insurance funds maintained by the private banking industry – that proved their mettle in the financial crisis have to retain their complete right of maintenance. These systems have to be recognized as being fully-entitled components of the new Europe-wide system of deposit guarantees. Europe's heterogeneity of banking markets has to be taken into account.
The Initiative strongly, moreover, opposes the demand that national-level, legally-mandated systems of deposit insurance be entitled to grant each other loans. The Initiative also rejects the participation by legally-mandated systems of deposit insurance in bail-ins. “We are in favor of Europe's having a single set of rules. We do, however, reject the reciprocal granting of credit. This would be tantamount to a communitization of insurance funds,” says Andreas Schmidt, speaker of Munich Financial Center Initiative. “Autonomously-functioning deposit security systems have to be financed by their members,” adds Schmidt. A higher level of protection requires the making of the corresponding expenditures. The higher level of protection prevailing in Germany efficaciously meets the needs of consumer protection as well. It does not – in contrast to the contention of the EU Commission - constitute a distortion of competition disadvantaging non-German banks.
Outfitting the funds to the extent of 0.5% of deposits is acceptable
The Initiative is calling for using realism when setting the size of the insurance funds. “Realism” means in this case a magnitude taking into account the encumbrances currently being shouldered by banks. “It would be impermissible for the equipping of the security systems with funds to cause an over-burdening of banks,” explains fpmi spokesperson Schmidt. The European Parliament has called for these funds to amount to 1.5% of customer deposits. This is clearly too high. The 0.5% suggested by the European Council is acceptable to fpmi, even though this too will constitute a heavy burden for the savings and other kinds of banks to bear.
A further shortening of the term of pay-outs is viewed by fpmi extremely critically. The reduction of this term from three months to 20 working days took effect only on January 1, 2010. “The best idea would be to see how the new term is working,” states fpmi speaker Schmidt. “It is only after doing such that it can be ascertained whether or not a step-by-step further reduction of the term would make sense.”
Informing savers and testing the system
The directive also foresees an improvement in the flow of information to savers, who are to be clearly briefed on whether or not their deposits are covered, and on how the deposit insurance system functions. Germany already has a comprehensive code of regulations (§ 23a KWG) that ensures this. The Initiative advocates a one-time briefing of customers on deposit protection and on the new system of deposit insurance. This briefing is to be printed on a bank statement. Putting such a briefing on every bank statement that each bank customer receives is viewed as overshooting the mark. The same applies to the introduction of an obligatory confirmation of having read such upon the utilization of the Internet.
The monthly compilation of a report on deposits covered – to be similar to annual accounts – would give rise to substantial costs. It does not accord to the actual objective of the directive. Such a compilation would, in addition, contradict the principle of avoidance or thriftiness of data. This principle forms a key part of such laws as Germany's Federal Data Protection Act. The Initiative views the annual calculation and dissemination of the sum of deposits covered as being sufficient.
The EU Commission's approach would be to subject on a regular basis the deposit guarantee system to tests. The Initiative understands the Commission's reasoning in this area, but wishes to raise the point that these tests should not be allowed to become a burden to the systems of deposit security. These tests should for that reason be carried out, if need be, every five years. The exception would be in cases in which the system already has had to compensate savers.