Financial Crisis and Deposit Guarantee Schemes in the EU

1. Check againstdelivery InternationalConference of the Bank Guarantee Fund "Global Financial Crisis: Lessons for the Stability of the Financial Sector" Warsaw, 21 May 2010 Financial Crisis and Deposit Guarantee Schemes in the EU 15 Dr. Elemér TertákDirector

2. The rationale and origin of DGS “After all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people.” Franklin D. Roosevelt / President, USA “A deposit insurance system is like a nuclear power plant. If you build it without safety precautions, you know it’s going to blow you off the face of the earth. And even if you do, you can’t be sure it won’t.” L. William Seidman / Chairman, FDIC (1985 -1991).

3. The origins of DGS in the EU • Long tradition of deposit insurance in EU Member States; national schemes well-established at an early stage; • Commission Recommendation in December 1986 concerning the introduction of depositguarantee schemes in the Community (87/63/EEC) • EU-wide action in May 1994: the Deposit Guarantee Directive (94/19/EC), based on minimum harmonisation • Some features of national schemes: • Minimum level of coverage (€20,000) • Home country scheme to cover depositors of EU branches • Requirements regarding information to be provided to depositors • Following the adoption of the Directive several DGS were established in Member States where there were none • One of the new DGS was the Bank Guarantee Fund (BGF) – established in February 1995 as part of the overall reform of the Polish banking sector (on the basis of the Act adopted by the Polish Parliament in December 1994) • For many years, the DGS Directive remained unchanged (the review of 2005-2006 concluded that necessary improvements might be achieved without legislative amendments)

4. The need to change the EU system of DGS • The situation changed dramatically due to the financial crisis • The run on Northern Rock in 2007 was the first warning and forced the UK authorities to make significant changes to the national DGS • The aggravation of the financial crisis in 2008 and uncoordinated actions by Member States (raising the coverage levels, introducing unlimited deposit protection) threatened financial stability in the EU • In order to restore depositor confidence and maintain financial stability, an action at EU level was necessary: in October 2008, the Commission – following the ECOFIN conclusions – proposed the most urgent changes to the DGS Directive (raising and fixing the level of coverage, abandoning co-insurance, reducing payout delay)

5. Coverage levels before and after the aggravation of the crisis

6. The need to change the EU system of DGS – cont’d • Following the rapid procedure, the amendments to the DGS Directive were agreed in December 2008 and Directive 2009/14/EC amending original Directive 94/19/EC entered into force in March 2009 • Although Directive 2009/14/EC made significant progress compared to the pre-crisis situation, it was only a “quick-fix” and a comprehensive review and revision of the DGS Directive is still needed • Article 12 of the amended DGS Directive requires the Commission to prepare a report on the review of the DGS Directive and, if necessary, a legislative proposal

7. The current review of the DGS Directive: state of play • May-July 2009: Public consultation on the planned DGS review • Spring 2010: Finalisation of the impact assessment on the proposed revision of the DGS Directive • Summer 2010: Publication of the Commission set on DGS: • legislative proposal to replace Directives 94/19/EC and 2009/14/EC by a new DGS Directive • report on the DGS review (issues not covered by legislative proposal) • impact assessment

8. The current review of the DGS Directive: key issues • Level of coverage: fixed level of EUR 100 000 from end-2010 • Scope of coverage: inclusion of all enterprises, exclusion of financial institutions and all-level authorities; inclusion of deposits in non-EU currencies, exclusion of debt certificates and structured deposits • Payout delay: further substantial shortening of the payout delay, ensuring early involvement of DGS • Financing: mandatory and dominant ex-ante funding; target level for DGS funds; risk-based contributions • Other issues to be decided (DGS mandate, pan-EU DGS)

9. Eligibility of depositors: the case of enterprises Amount of eligible deposits held by enterprises in the EU (2006) Number of enterprises in the EU (2006) Total number of SME: 20 million Total amount of eligible deposits held by enterprises: € 4.05 trillion

10. Heterogeneous level of DGS funding Coverage ratios* in the EU and Norway (2007) * Coverage ratio = ex-ante fund / eligible deposits

11. Risk-based contributions (RBC) • Financial crisis emphasized the need to take risk profiles of banks into account – not only in supervision but also in other areas, including DGS • RBC create incentives for better risk management in banks and limit moral hazard; on the other hand, they might be pro-cyclical • Currently, only a few DGS in the EU apply RBC (e.g. France, Italy, Germany); some other DGS use selected elements of risk weighting (e.g. BGF in Poland) • Commission services believe that RBC should be mandatory and harmonised (however, keeping in mind differences among Member States, full harmonisation of RBC does not seem feasible at this stage; some flexibility is needed)

12. Mandate of DGS • A narrow DGS mandate (‘pay-box’ function only) or a broader one (DGS involved in bank resolution as well)? • A broad DGS mandate would need to be adequately funded (but should the DGS funds for payout be ring-fenced from the funds for other purposes, e.g. bank resolution?) • Currently, there are 11 Member States with DGS having a broader mandate (e.g. Polish BGF that is allowed by law to grant direct financial assistance to banks at risk of insolvency in order to enable them to implement recovery and restructuring measures) • At the moment, DGS and bank resolution are separate workstreams (since the former is much more advanced than the latter)

13. Pan-EU DGS • Financial crisis emphasized the need for better cross-border cooperation of Member States • Current DGS system is highly fragmented: almost 40 DGS in the EU • Several options as to a pan-EU DGS have been analysed by the Commission services: from a network of DGS to a single pan-EU DGS • While a single pan-EU DGS seems to be rather a longer-term project, a network of existing DGS (strengthened by the principle of solidarity, i.e. borrowing among schemes) could be implemented as the first step • The principle of solidarity would create an additional source of DGS funding to avoid the use of taxpayer money

14. Network of DGS: the principle of solidarity DGS in need Other DGS in the EU Ex-ante funds (depleted) Ex-ante funds Ex-ante funds Ex-ante funds Solidarity funds Solidarity funds Solidarity funds Target level forex-ante funds Ex-post fundsto be used at first Target level for ex-post funds Solidarity funds from other DGS(to be repaid in medium term) Ex-post funds (including borrowing by DGS) Ex-post funds (including borrowing by DGS) Ex-post funds (including borrowing by DGS) Additional funding sources of DGS in need

15. Depositor information and financial education • Last but not least, the current crisis confirmed the importance of reliable depositor information to avoid panics and bank runs • Also, financial education of the society is an important factor contributing to overall financial stability • In this context, DGS have an important role to play • For example, in Poland, BGF have undertaken numerous initiatives in recent years aimed at building widespread trust in the banking system and teaching people the principles of managing their finances • In particular, as part of global efforts of DGS (within IADI and EFDI), BGF developed Best Practices for notifying customers of their bank’s participation in the mandatory DGS and Best Practices for informing the customers of their bank’s economic and financial standing

16. Concluding remarks • Deposit Guarantee Schemes are key elements of the safety net • Financial crisis emphasized serious drawbacks of the current DGS framework in the EU and the need to amend the DGS Directive • The key principles of the current review of the DGS Directive conducted by the Commission are: maximum harmonisation and simplification as well as strengthening DGS funding (including risk-based contributions) • There are some important issues to be decided, such as a DGS mandate and a pan-EU DGS; relation between DGS and Resolution Fund • Despite of the review, the overarching objectives of the DGS Directive remain unchanged: protecting depositors and contributing to financial stability