Deposit guarantee schemes in the spotlight again
07/16 Banking & Finance
Deposit guarantee schemes – Implementation Directive 2014/49/EU – Cooperation agreements – Stress tests
Recent events have put deposit guarantee schemes once again on the forefront of the discussions related to the banking sector.
In Belgium, the failure of Optima Bank raised the question – unanswered as of yet – whether the bank’s own assets would suffice to redeem the bank’s deposit holders or whether intervention of a deposit guarantee scheme would be necessary (see e.g. Trends and Spaargids.
In Italy, worries about the Italian banks’ exposure to bad loans amounting in total to 360 billion euros threaten to cause the collapse – visible in the rapidly sinking stock market price – of certain Italian banks, among which is the world’s oldest bank Monte dei Paschi di Siena (see e.g. the Economist). The recent financial turmoil caused by the ‘brexit’ further exacerbates the worries.
Following the global financial crisis of 2007, the European legislator replaced the European rules on deposit guarantee schemes contained in Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes (OJ. L. of 31 May 1994, no. 135, 5) by a new Directive 2014/49/EU of the European Parliament and of the Council of 14 April 2014 on deposit guarantee schemes (OJ. L. of 12 July 2014, no. 173, 149; hereinafter “Deposit Guarantee Schemes Directive”). The aim of this directive is to further implement (together with the Single Resolution Mechanism and the Bank Recovery and Resolution directive) the banking union with a view to restoring confidence in the banking sector, to reassuring depositors as to their savings and to ensuring taxpayers will no longer foot the bill when banks face difficulties. Deposit guarantee schemes would reassure deposit holders by granting them the right to recover their savings up to a maximum amount of 100 000 euros for the aggregate deposits of each depositor. This would lead to avoiding in ‘bad times’ a so called ‘run on the bank’.
The Deposit Guarantee Schemes Directive provides for a maximum harmonisation of the rules on deposit guarantee schemes by requiring the introduction of at least one officially recognised deposit guarantee scheme in each EU Member State and setting forth financing requirements and deadlines for repayment.
Its provisions, however, require transposition into national law and implementation measures to really resort any effect (notwithstanding the legal mechanisms for the direct effect of European law). The provisions of the Deposit Guarantee Schemes Directive have recently been partly executed by certain legislative acts.
More specifically, the Deposit Guarantee Schemes Directive has, on the one hand, partially been transposed into Belgian law and, on the other hand, been complemented by two guidelines developed by the European Banking Authority (hereinafter “EBA”).
In what follows, these three recent legislative implementation measures are discussed shortly.
1. The law of 22 April 2016 transposing Directive 2014/49/EU on deposit guarantee schemes and containing various provisions, BS 12 May 2016, into force since 12 May 2016
This law partly transposes the Deposit Guarantee Schemes Directive into Belgian law, mainly by amending the law of 25 April 2014 on the status and the supervision of credit institutions (BS 7 May 2014, 36794; hereinafter “Bank Law”) and the Royal Decree of 14 November 2008 executing the law of 15 October 2008 containing provisions stimulating financial stability and particularly establishing a state guarantee for loans granted and other transactions in the context of financial stability for what concerns the protection of deposits, life insurances and the capital of recognised cooperative corporations and amending the law of 2 August 2002 on the supervision of the financial sector and financial services (BS 17 November 2008, 61285).
The provisions of the Deposit Guarantee Schemes Directive of a more technical nature will, according to the Explanatory Memorandum, be transposed on a later date by a Royal Decree that will amend, amongst others, the Royal Decree of 16 March 2009 on the protection of deposits and life insurances by the Special Protection Fund for deposits and life insurances (BS 25 March 2009, 23950).
The Law of 22 April 2016 especially amends the Bank Law in the following manner:
- deposit bonds are, as an exception on the exclusion of financial instruments, included among the guaranteed and eligible deposits in article 3, 68° and 69° of the Bank Law;
- the purpose of the deposit guarantee scheme is expanded in article 380, first subsection of the Bank Law to the financing of the resolution of credit institutions and the financing of measures to preserve the access of depositors to covered deposits in the context of insolvency proceedings of the credit institution concerned;
- an additional protection above the maximum coverage of 100 000 euro per depositor and per participating institution is provided by article 382 of the Bank Law in the instances of temporary high balances resulting from real estate transactions relating to private residential properties or from certain life events, insurance payments or criminal compensations that are to be determined by Royal Decree;
- the repayment period is reduced, by article 381, subsection three of the Bank Law, from 20 working days to 7 working days starting from 1 January 2014, using a gradual reduction over a transitional period (15 working days from 1 January 2019 and 10 working days from 1 January 2021) coupled with a ‘social payments’-procedure that grants access to the covered deposits to cover the costs of living within five working days of a request.
To the Royal Decree of 14 November 2008, the law of 22 April 2016 adds, amongst others, an article 5/1 that regulates the repayment of depositors at branches set up in Belgium by a credit institution established in another EU Member State and vice versa – the deposit guarantee scheme of the host Member State shall pay on behalf of and under the instructions of the deposit guarantee scheme of the home Member State – as well as provisions that deal with the financing of deposit guarantee schemes, including the mandatory ‘ex ante’ and ‘ex post’ components and the extraordinary contributions due if the financial means of the deposit guarantee scheme would not suffice – which are still to be determined by the King. It also replaces every mention of the Special Protection Fund (“Bijzonder Beschermingsfonds”) in this Royal Decree with the words Guarantee Fund for financial services (“Garantiefonds voor financiële diensten”).
The Law of 22 April 2016 also abolishes the Special Protection Fund for deposits and life insurances’ competence regarding the protection of deposits by abolishing article 3, a) of the law of 7 December 1998 establishing a protection fund for deposits and financial instruments and reorganising the protective measures for deposits and financial instruments (BS 31 December 1998, 42104), thereby ensuring that the deposit guarantee scheme has sole competence. It further allocates the Financial Services and Markets Authority (FSMA), in article 45, § 1, 3°, j) of the Law of 2 August 2002 on the supervision of the financial sector and financial services (BS 4 September 2002, 39121) supervisory competences concerning the information on deposit guarantee schemes credit institutions have to provide actual and future depositors with.
2. Guidelines on cooperation agreements between deposit guarantee schemes
As mentioned above, Belgian law now contains a provision – article 5 of the Royal Decree of 14 November 2008 – dealing with the repayment of depositors of a branch of a credit institution established in another EU Member State. According to article 14, (2) of the Deposit Guarantee Schemes Directive, these depositors are repaid by a deposit guarantee scheme in the host Member State on behalf of the deposit guarantee scheme in the home Member State. The deposit guarantee scheme of the home Member State has to provide the necessary funding prior to payout and must compensate the deposit guarantee scheme of the host Member State for the costs incurred.
In order to ensure, amongst others, quick, timely and efficient cross-border repayments between deposit guarantee schemes, article 14, (5) of the Deposit Guarantee Schemes Directive requires that deposit guarantee schemes shall have written cooperation agreements in place.
The EBA guidelines of 15 February 2016 (that will apply from 6 months from the publication of their translation in all EU official languages on the EBA’s website)– further elaborate the legal framework for these cooperation agreements between deposit guarantee schemes. They aim to strengthen the resilience of the European system of national deposit guarantee schemes by ensuring a common and consistent approach to the cooperation agreements by specifying their minimum content and providing a model of a multilateral framework cooperation agreement to which deposit guarantee schemes can accede, thereby offering depositors a better protection in case of the failure of a credit institution with cross-border establishments.
To this end, the guidelines specify the minimum content of the cooperation agreements in relation to:
- modalities for repaying depositors by the deposit guarantee scheme of the host Member State at branches of credit institutions headquartered in other Member States;
- modalities for the transfer of contributions from one deposit guarantee scheme to another in case a credit institution ceases to be a member of a deposit guarantee scheme and joins another deposit guarantee scheme; and
- modalities for mutual lending between deposit guarantee schemes.
The guidelines further contain provisions on the sequence and timing of events when the deposit guarantee scheme of the host Member State performs a payout of depositors on behalf of the deposit guarantee scheme of the home Member State.
3. Guidelines on stress tests of deposit guarantee schemes under Directive 2014/49/EU
The Guidelines on stress tests of deposit guarantee schemes were adopted by the EBA on 24 May 2016 on its own initiative on the basis of article 16 and article 26, (1) of Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ. L. of 15 December 2010, no. 331, 12). They promote a common and consistent application of the stress tests – which deposit guarantee schemes within the EU have to perform according to article 4, (10) of the Deposit Guarantee Schemes Directive by 3 July 2017 and subsequently at least every three years – that are necessary for them to be credible assessment tools and to improve the resilience of the European System of national deposit guarantee schemes.
To this end, the guidelines provide for a systematic methodology on the basis of which stress tests have to be planned (e.g. a steering team in charge of planning and coordinating must be appointed, sufficient resources must be allocated and arrangements must be made to assure the objectivity of the underlying assumptions), executed (e.g. certain formats can be used and internal and external participants can be included) and reported (e.g. the steering team interprets and corrects the results and corrective measures must be taken if weaknesses are identified).
The guidelines further contain methodological principles that, amongst others, specify:
- how the stress tests are to be organised with regard to different intervention scenarios (i.e. compensating depositors, financing the resolution of credit institutions, financing alternative measures in order to prevent the failure of a credit institution and financing measures to preserve the access of depositors to covered deposits in the context of national insolvency proceedings);
- which affiliated credit institutions are to be included in intervention scenarios;
- the severity and complexity with which the intervention scenarios are to be tested; and
- the test areas and indicators the stress tests have to cover, which mainly concern, besides the various operational stages of a deposit guarantee scheme intervention, the operational capabilities (e.g. access to data, staff and payment systems) and funding capabilities (e.g. ‘ex ante’ funding and ‘ex post’ contributions and alternative funding means) of a deposit guarantee scheme, allowing an appreciation of the operational risks and funding risks.
The guidelines also determine the four stress tests (i.e. SCV file tests, an operational capability test, an operational cross-border cooperation test and a funding capability tests) that are to be prioritised, performed and reported (using the template in Annex I) by 3 July 2019 so that their results can be used for the peer review the EBA shall conduct by 30 July 2020, and subsequently every five years, in order to examine the resilience of deposit guarantee schemes.
The guidelines will apply from two months after their issuance in all EU languages and competent authorities and financial institutions shall henceforth have to make every effort to comply with them in accordance with article 16, (3) of Regulation (EU) No 1093/2010.
Régine Feltkamp / Gerrit Hendrikx / Joeri Danhieux