Safe haven Germany? – Limits to deposit guarantees
Please, note: In July 2015, the new Deposit Guarantee Act entered into force, transposing into German law the harmonised requirements of the amended European Deposit Guarantee Scheme Directive. Here and here are the main changes. Thanks to Stefanie Schulte on Twitter (@schulte_stef) for drawing attention to these changes.
One concomitant of the euro crisis is capital flight from European periphery countries such as Greece, Ireland and Portugal to Germany which erroneously is widely considered as the last safe haven in the euro area. As a rule, German citizens, too, would regard their country as stronghold of financial safety which refers not only to a presumed comparable strength of their banks but to the country’s state-backed system of deposit guarantees.
The question is what is meant by “state-backed”.
Deposit guarantees are thought to protect repayment claims of depositors in case a financial institution is unable to repay customers’ deposits. Often called “deposit insurance”, it is no insurance, as Frances Coppola explains, as depositors do not have to pay for it (at least not directly) – and, in fact, as Wolfgang Gierls rightly emphasizes, are not entitled to compensation.
Instead, BaFin speaks of deposit guarantees although, as we will see, when it comes down to it there may be not much of a guarantee either. Banks participate in a statutory compensation scheme, which is how state involvement comes in. Membership in the scheme is a prerequisite for banks to be allowed to run their businesses. Beyond this there is no state “backing” as we will see shortly.
The German system of deposit guarantees consists of three components: (1) statutory compensation schemes, (2) institution protection schemes and (3) voluntary deposit guarantee schemes. The following quotations in italics are from BaFin’s FAQ page.
Definition of deposits
Deposits are essentially account balances (deposits on current accounts and savings accounts, overnight money or time deposits, registered savings bonds, and similar) as well as receivables which the institution has securitised by issuing an instrument (registered bonds and similar), but e.g. not bearer and order bonds, liabilities arising from participating rights or liabilities under promissory notes.
Statutory compensation schemes
Banks belong to different statutory schemes and are members of different “Entschädigungseinrichtungen” [compensation agencies]:
Private banks as well as building and loan associations belong to Entschädigungseinrichtung deutscher Banken GmbH (EdB), a subsidiary of the Association of German Banks (Bundesverband deutscher Banken – BdB).
For public sector banks (e.g. development banks), the compensation scheme of Bundesverband Öffentlicher Banken Deutschlands GmbH (Entschädigungseinrichtung des Bundesverbandes Öffentlicher Banken in Deutschland – EdÖ), a subsidiary of the Association of German Public Sector Banks (Bundesverband Öffentlicher Banken Deutschlands – VÖB), was established.
For securities trading companies (e.g. securities trading banks, financial services providers, asset management companies (Kapitalanlagegesellschaften)) the Compensatory Fund of Securities Trading Companies (Entschädigungseinrichtung der Wertpapierhandelsunternehmen – EdW) is responsible.
Institution protection schemes
Banks which are members of an institution protection scheme are exempted from mandatory membership in a statutory compensation scheme. This includes all public-sector savings banks (Sparkassen), state banks (Landesbanken) and state building and loan associations (Landesbausparkassen) as well as co-operative banks (Genossenschaftsbanken)
The objective of these schemes is to preserve the member institutions from insolvency and liquidation, and their customers are protected indirectly [my emphasis] from losing of their deposits.
In addition to the statutory deposit guarantee schemes, many institutions (private banks, private building and loan associations as well as public sector banks) have entered into voluntary arrangements for the protection of deposits and liabilities under securities transactions which seek to provide a level of protection for customer monies exceeding the minimum statutory scope.
The following voluntary deposit guarantee schemes exist:
Private banks can additionally protect their customers’ monies through a deposit guarantee fund of the Association of German Banks (Bundesverband deutscher Banken e.V. – BdB).
For public sector banks, the voluntary Deposit Guarantee Fund of the Association of German Public Sector Banks (Bundesverband Öffentlicher Banken Deutschlands e.V. – VÖB) was established.
The majority of the building and loan associations are members of the deposit guarantee fund Bausparkassen-Einlagensicherungsfonds e.V.
How is the statutory scheme financed?
All members of the scheme pay an annual membership fee to EdB, EdÖ and EdW respectively. If the means get exhausted, the institutions are entitled to levy additional contributions from their members (BaFin). If these do not suffice either, they may even resort to loans (FORAIM).
Extent of protection
Statutory deposit guarantee schemes are not intended to protect all claims. They guarantee the customer that deposits as defined above are protected up to an amount of € 100,000 per institution. For joint accounts the amount is €100,000 per account holder and institution (BaFin).
With regard to the voluntary Deposit Guarantee Scheme of the Association of German Banks, information about the level of protection is given on request.
Who is protected?
The statutory scheme is thought to protect above all private investors and small enterprises. To quote the German BaFin site:
Die gesetzliche Einlagensicherung schützt vorrangig private Anleger (u.a. Privatpersonen, Gesellschaften bürgerlichen Rechts, eingetragene Vereine, Stiftungen, Wohnungseigentümergemeinschaften) und kleinere Unternehmen. Eine Auflistung der vom Schutz ausgeschlossenen, zumeist institutionellen Anleger findet sich in § 3 Abs. 2 Einlagensicherungs- und Anlegerentschädigungsgesetz.
Voluntary schemes protect private investors and companies:
Bei den freiwilligen Sicherungseinrichtungen gilt der Schutz ebenfalls vornehmlich den Privatanlegern und Wirtschaftsunternehmen.
How are depositors compensated?
Under the statutory scheme, as soon as the case is officially stated that a bank cannot repay its customers’ deposits the respective compensation agency informs all its members. They then have one year to notify their claims. The compensation agency decides about their entitlement and makes the payments.
Voluntary schemes have special rules. The most important aspect is that the statutes of all of them exclude a legal right of compensation as the following excerpts show:Courtesy of FORAIM.
An obligation to provide compensation exists only for deposits and liabilities under securities transactions denominated in euros and other currencies of the EU member states (section 4 (1) of the Deposit Guarantee and Investor Protection Act (Einlagensicherungs- und Anlegerentschädigungsgesetz – EAEG). That means that, for example, US dollar accounts or deposits in Swiss francs are not protected.
A German branch of an institution from another EU Member State or the European Economic Area (EEA) is normally covered by the deposit guarantee scheme of the respective home country which offers a protection at least equal to that of the German statutory compensation schemes.
Branches of institutions from countries outside the EU or the EEA are members of the German statutory compensation schemes. If a foreign institution (from the EU/EEA region and other countries) establishes a subsidiary in Germany, this institution is also a member of a German statutory compensation scheme.
In contrast to a widespread belief, in Germany there is no state guarantee for bank deposits. Even under the statutory scheme, the money comes from the banks, and depositors can only expect compensation as far as the respective schemes are solvent and creditworthy. In a systemic crisis affecting more than one bank this “safety net” may not hold.
The myth of a state guarantee is rooted in a respective statement of Chancellor Angela Merkel and then Finance Minister Peer Steinbrück in October 2008, when HRE threatened to collapse. Merkel afterwards repeated it several times during the euro crisis, although Steinbrück qualified it in a later interview (“Dabei haben wir … wohlweislich offengelassen, was unter dem Begriff Spareinlagen genau zu verstehen ist”).
Needless to say, verbal statements are no substitute for parliamentary decisions and do not constitute a legal right of compensation.