Deposit protection in Germany

Deposit protection in Germany The Deposit Guarantee Act (Einlagensicherungsgesetz) entered into force on 3 July 2015, trans￾posing into German law the harmonised requirements of the amended European Deposit Guar￾antee Scheme Directive. The new Deposit Guarantee Act supersedes the Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz), which entered into force in 1998 and at the time implemented both the EU Deposit Guarantee Scheme Directive and the EU Investor Compensation Scheme Directive. The report begins by summarising the current legal situation and then goes on to explain the new harmonised provisions and how they are being implemented in Germany. The statutory depositor compensation scheme set up in 1998 for private and public-sector banks will remain in place, while important changes will be made to the institutional protection schemes of the German banking industry. Overall, the protec￾tion level for depositors will improve further. On this basis, the German deposit protection system will remain anchored at the national level. The report will conclude by presenting and assessing the current plans for a common European deposit insurance scheme (EDIS). Deutsche Bundesbank Monthly Report December 2015 47

Experience of statutory depositor compensation in Germany since 1998 The implementation of the EU Deposit Guaran￾tee Scheme Directive (94/19/EC of 30  May 1994) in Germany created harmonised struc￾tures for a statutory depositor compensation scheme, which then entered into force on 1 August 1998 as the Deposit Guarantee and Investor Compensation Act (Einlagensiche￾rungs- und Anlegerentschädigungsgesetz), or DGICA.1 This act established two statutory compensation schemes, one for private-sector banks and the other for public-sector banks, located at the level of the respective banking associations; these compensation schemes and their tasks and powers have remained un￾changed since then. The structures created at the time have also been perpetuated by the transposition into German law of the recast Deposit Guarantee Scheme Directive (2014/49/ EU) of 16 April 2014 through the Deposit Guar￾antee Act (Einlagensicherungsgesetz), which entered into force on 3 July 2015. Since the entry into force of the DGICA, all banks providing deposit-taking services have been required to belong to a statutory depos￾itor compensation scheme. The statutory com￾pensation schemes of the Association of Ger￾man Banks (EdB) and of German public banks (EdÖ) act here in a private-law capacity under a statutory mandate as “entrusted compensation schemes”.2 By contrast, the institutional protec￾tion schemes of the German Savings Banks and Giro Association (DSGV) and the Federal Asso￾ciation of German People’s Banks and Raiff￾eisen Banks (BVR), pursuant to Article 113 (7) of the Capital Requirements Regulation (CRR), are associations of multiple banks which have entered into a liability arrangement. Their main function is institutional protection, ie averting the bankruptcy of a member institution. They have been regarded thus far as “alternative” systems within the meaning of the 1994 EU Deposit Guarantee Scheme Directive, which meant that their members were exempted from the provisions of the DGICA and thus did not have to belong to any statutory depositor compensation scheme. The term “alternative” refers to systems which protect depositors in￾directly through an existing institutional protec￾tion scheme. The statutory deposit protection scheme is sup￾plemented by the voluntary deposit insurance arrangements within the separate deposit guarantee schemes established by each bank￾ing group association. Since the DGICA was originally introduced with a statutory guaran￾tee of up to 90% of liabilities up to a maximum amount of €20,000 per depositor and institu￾tion, the voluntary deposit protection systems at private and public banks have been provid￾ing additional deposit protection regarding the limit, volume of insured deposits and definition of protected depositors. For competitive rea￾sons, a large percentage of credit institutions also belong to a voluntary guarantee scheme. The type and scope of the protection for indi￾vidual investors are determined by the private￾law statutes of the respective guarantee scheme. The private deposit protection fund of the Federal Association of German Banks cur￾rently voluntarily insures the deposits of each individual customer up to 20% of that respect￾ive bank’s regulatory own funds. As of 1 Janu￾ary 2012, the Federal Association of German Banks decided to gradually reduce the limit for its voluntary deposit insurance to 8.75% of its liable capital by 2025. All statutory and voluntary deposit guarantee schemes in Germany are funded by members’ regular annual ex ante contributions. Systems Statutory depos￾itor compensa￾tion scheme in Germany created in 1998 Statutory deposit protec￾tion and institu￾tional protection schemes specific to each group of banks Voluntary deposit protec￾tion supple￾ments statutory protection How statutory compensation schemes are funded 1 See Deutsche Bundesbank, Deposit protection and in￾vestor compensation in Germany, Monthly Report, July 2000, pp 29-45. The present article will deal with deposit protection; it will not cover any aspects of investor protec￾tion. 2 The tasks and powers of a statutory compensation scheme may be transferred to legal entities under private law if they meet the requirements for fulfilling the statutory task. Non-public-law shareholders of a depositor compen￾sation scheme are given the function of “entrusted com￾pensation schemes” upon whom a public task is conferred. This means that compensation schemes organised under private law can issue administrative acts. Deutsche Bundesbank Monthly Report December 2015 48

funded ex ante have an advantage over ex post funded systems in that funds which have already been paid in can be used immediately in a compensation or insurance case; compen￾sation is thus independent of the paying insti￾tutions’ current profitability and liquidity. The size of contributions, method of calculating them, any relevant one-off contributions and, as appropriate, the minimum volume of the in￾surance fund are governed by the DGICA or the corresponding legal regulations as well as the associations’ own private-law articles of association or statutes. In order to enhance depositors’ confidence in the security of their deposits, which suffered a heavy blow during the financial crisis, the EU Deposit Guarantee Scheme Directive raised the protection limit in two stages, first to €50,000 and then, as of 1 January 2011, to €100,000. In order to be able to cope with these higher har￾monised compensation claims, the deposit guarantee schemes needed a higher volume of DGICA funding. In the implementing contribu￾tion regulations adopted in 2009, the annual contribution was raised from 0.008% to 0.016% of the assessment base (liabilities vis-à￾Adjusting fund volumes to higher protec￾tion limit Overview of deposit insurance in Germany CRR credit institutions Statutory deposit guarantee schemes pursuant to the Deposit Guarantee Act (Einlagen sicherungsgesetz) Institutional protection schemes;1 voluntary deposit insurance with a private legal form Credit cooperatives and regional institutions of credit cooperatives Statutory protection2 Provided by: Federal Association of German People’s Banks and Raiffeisen Banks (BVR Institutssicherung GmbH)3 Institutional protection Provided by: Protection Scheme of the Federal Association of German People’s Banks and Raiffeisen Banks (BVR-Sicherungs einrichtung)4 Other CRR credit institutions Statutory protection2 Provided by: Compensation Scheme of German Banks (Entschädigungseinrichtung deutscher Banken GmbH, or EdB) Supplementary protection for deposits not covered by deposit guarantee schemes pursuant to the Deposit Guarantee Act; per depositor up to 20% of the respective bank’s liable capital relevant for deposit insurance 5 Provided by: Deposit Protection Fund of the Association of German Banks (Einlagen￾sicherungsfonds des Bundesverbandes deutscher Banken e.V.) with a public legal form Savings banks, Landesbanken, public building and loan associations Statutory protection2 Provided by: German Savings Banks and Giro Association (Deutscher Sparkassen￾und Giroverband, or DSGV), regional savings bank associations6 Institutional protection Provided by: German Savings Banks and Giro Association (Deutscher Sparkassen￾und Giroverband, or DSGV), regional savings bank associations7 Other CRR credit institutions Statutory protection2 Provided by: Compensation Scheme of the Association of German Public Sector Banks (Entschädigungseinrichtung des Bundesver￾bandes Öffentlicher Banken Deutschlands GmbH, or EdÖ) Supplementary protection for deposits not covered by deposit guarantee schemes pursuant to the Deposit Guarantee Act up to the full amount8 Provided by: Deposit Protection Fund of the Association of German Public Sector Banks (Einlagensicherungsfonds des Bundesverbandes Öffentlicher Banken Deutschlands e.V.) 1 Institutional protection schemes of the banking industry at the level of the respective associations; protect member institutions by virtue of statutes in the event of economic diffi culties, with support and recovery measures to prevent insolvency. 2 Deposit protection covers all savings, time and transferable deposits as well as registered savings bonds. Deposits denominated in euro and foreign currency are covered. Bearer debt securities and certifi cates are not subject to depositor compensation. Under all of the schemes, claims of up to €100,000 per depositor per institution have to be compensated, with claims of up to €500,000 being permitted in special cases. Pro￾tected depositor group: primarily private individuals. In particular, the deposits of credit institutions, institutional investors and public bodies are not protected. 3  BVR Institutssicherung GmbH guarantees statutory compensation claims (depositor compensation) and practises institutional protection. Institutional protection is a recognised form of deposit insurance pursuant to the Deposit Guarantee Act. 4 In addition, protection is provided by the BVR’s voluntary protection scheme within the framework of the institutional protection func￾tion in accordance with its articles of association. 5 Gradual lowering of protection ceiling to 8.75% of relevant liable capital by 2025. As an exception to this rule, the protection ceiling for new institutions joining the fund amounts to only €250,000 up to the end of the third calendar year of their participation in the deposit protection fund. All non- bank deposits are protected. 6 The previous protection scheme of the Savings Bank Finance Group (Sparkassen- Finanzgruppe) is being expanded to include a deposit protection function. 7 Joint- liability scheme. 8 Deposits of private individuals, business enterprises and municipalities are protected. Deutsche Bundesbank Deutsche Bundesbank Monthly Report December 2015 49

vis customers).3 The moderate pattern in the number of compensation cases means that no significant financial sustainability risks have arisen for institutions required to make pay￾ments. The Contribution Regulations of the Deposit Guarantee Scheme of German Banks were amended again on 12 December 2011 to intro￾duce criteria for the risk-based calculation of contributions. The aim of calculating contribu￾tions in a risk-based manner was to distinguish institutions’ contributions by default risk in order to fund the compensation scheme more in accordance with the “polluter pays” prin￾ciple. The procedures being considered are based largely on the method of calculating contributions that has been practiced for many years already by the voluntary deposit protec￾tion fund of the Federal Association of German Banks. Since the introduction of statutory depositor compensation in Germany, there have been a number of individual compensation cases. In these cases, depositors’ claims pursuant to the DGICA were successfully satisfied out of the funds provided by the statutory compensation scheme. The compensation cases also included those in which only the statutory compensa￾tion claim applied since the institutions involved were not members of a voluntary deposit guar￾antee scheme established at the level of the respective banking association. Further developing the EU Deposit Guarantee Scheme Directive of 1994 at the European level Experience of and amendments to the EU Deposit Guarantee Scheme Directive since 1998 Directive 94/19/EC was based on the principle of minimum harmonisation. Member states were given the right, in clearly defined cases, to insure depositors above and beyond the har￾monised amounts; however, cover provided under national rules was not permitted to be less than that under the binding harmonised rules. This initial harmonisation step within the European Union was not able to fully erase the differences between individual member states’ deposit guarantee schemes, such as with regard to the definition of protected deposit￾ors. In addition, within the context of subsidiar￾ity, the systems were governed entirely by the member states. In order to comply with calls for harmonised conditions in the financial mar￾kets within the EU and to contribute towards the completion of the internal market, at EU level – also in the aftermath of the financial crisis in 2008 – the aim of greater harmonisa￾tion of deposit protection was pursued. It was not least the financial crisis which showed just how important depositor confidence is for the ability of the banking market to function prop￾erly. Directive 2009/14/EC of the European Par￾liament and of the Council of 11 March 2009 amending Directive 94/19/EC on deposit pro￾tection schemes advanced the cause of har￾monisation by increasing the protection limit in stages to €100,000 and reducing the payout delay from three months to 20 working days. Moreover, the amending directive dropped the 10% deductible introduced by the first Deposit Steps towards a more risk-based method of calculating contributions Compensation cases in Germany and consumer confidence Financial crisis in 2008 and consequences for statutory depositor compensation 3 See Regulations Amending the Contribution Regulations of the Deposit Guarantee Scheme of the Association of German Banks (EdB) and of the Federal Association of Pub￾lic Banks (EdÖ) of 17 August 2009. Deutsche Bundesbank Monthly Report December 2015 50

Guarantee Scheme Directive, which was in￾tended to encourage depositors’ risk aware￾ness; experience showed that the deductible had no material impact on depositors’ behav￾iour. Consultation on a more fundamental reform of harmonised deposit protection standards at the European level began in 2010. They culminated in the adoption of the new EU Deposit Guaran￾tee Scheme Directive (2014/49/EU) on 16 April 2014. The starting point was a European Com￾mission proposal which was published on 12 July 2010. The aim was to achieve a more comprehensive harmonisation of national de￾posit guarantee schemes by largely doing away with the principle of minimum harmonisation and going toward maximum harmonisation and EU-wide harmonisation of the funding of protection schemes, which under existing legis￾lation had been regulated at the national level under the principle of subsidiarity. Changes brought about by the new EU Deposit Guarantee Scheme Directive of 2014 The “new” EU Deposit Guarantee Scheme Dir￾ective (2014/49/EU) follows the principle of maximum harmonisation. This means that statutory protection above and beyond the harmonised level is no longer possible. The changes were so material that major sections of the directive had to be rewritten. However, member states, as before, have retained na￾tional responsibility for implementing deposit protection in their jurisdictions. The new harmonised rules impose specific re￾quirements for the available financial means of protection schemes. The financial means of protection schemes should generally amount to 0.8% of “covered deposits”. These deposits, which are now a material determinant for quantifying the funding volume of national deposit guarantee schemes, are defined as deposits which do not exceed the repayable cover limit of €100,000 per depositor and bank. Under certain conditions based on the concentration of the national banking sector, the target level for available financial means can be reduced by member states to 0.5% of covered deposits. In Germany, with its numer￾ous institutions, the conditions for such a reduction are not met. The financial means have to be raised within ten years through mandatory ex ante contribu￾tions by credit institutions. Contribution amounts are based not only on the amount of covered deposits but also on the degree of risk incurred by the credit institution. In order to bring about the uniform use of risk-based amounts with a view to creating a level playing field in the EU, the European Banking Authority (EBA) has developed guidelines for risk-based contributions within the meaning of the EU Deposit Guarantee Scheme Directive. Financial means also include irrevocable payment com￾mitments of banks, the share of which shall not exceed 30% of the total amount of available financial means. The EBA has also developed guidelines on the uniform application of such irrevocable payment commitments pursuant to the Deposit Guarantee Scheme Directive (EBA/ GL/2015/09 of 28 May 2015). Coverage remains limited to a maximum of €100,000 per customer and credit institution. This limit applies to any depositor known by name, ie to any “identifiable” depositor. Pursu￾ant to the Deposit Guarantee Scheme Direct￾ive, “eligible” deposits include primarily those by individuals. Deposits by financial institutions, investment firms, pension and retirement funds, insurance undertakings or public author￾ities are therefore not protected. Member states which had higher national statutory cov￾erage levels when the directive entered into force have until the end of 2018 to reduce the limit protection to €100,000. The directive added a social welfare compon￾ent to the harmonised protection limit: certain deposits that relate to personal affairs or social Extensive reform of EU deposit protection Maximum har￾monisation and improvement of consumer protection Harmonised funding of pro￾tection schemes is based on covered deposits New financial means in detail Limit of coverage for protected depositors still €100,000 Deutsche Bundesbank Monthly Report December 2015 51

welfare are given a higher level of protection. Such deposits include those resulting from real estate transactions relating to private residen￾tial properties or contributions which serve social purposes laid down in national law. In the case of a depositor’s life events, such as marriage, divorce, retirement, dismissal, redun￾dancy or invalidity, deposits in excess of €100,000 are protected for a period of up to twelve months. The statutory deposit protection scheme’s available financial means are primarily intended for repaying depositors. However, the funds can now also be used for the resolution of credit institutions. The resolution authority, fol￾lowing consultation with the deposit guarantee scheme, shall determine the amount by which the deposit guarantee scheme is liable.4 The directive also provides for alternative meas￾ures to be taken as part of an expanded de￾posit protection mandate. Within the meaning of the directive, alternative measures are con￾strued to be such uses of funds that serve to prevent the failure of an affiliated credit institu￾tion. However, this is permitted only if the reso￾lution authority has not undertaken any reso￾lution action, and only on the condition that the costs of the measure do not exceed the costs of fulfilling the statutory mandate of the deposit guarantee scheme.5 For depositors in Europe, the directive distinctly improves their potential claims to repayment in several ways. One is that the repayment period has been reduced from 20 to seven working days. Another is that the deposit guarantee schemes are now required to make available to depositors improved information about how their deposits are being protected. Moreover, there is, across Europe, an obligation to pro￾vide a pre-defined target level of ex ante fund￾ing, which means that the statutory deposit guarantee scheme has the means to satisfy its payment obligations in the same way across Europe. The directive allows member states to permit their deposit guarantee schemes to lend to other deposit guarantee schemes within the EU under certain conditions if the borrowing mem￾ber state’s available financial means are insuffi￾cient to fulfil obligations to its depositors. As lending between individual member states’ deposit guarantee systems is voluntary, there is no provision for a general communitisation of risks arising from deposit insurance. The new Deposit Guarantee Scheme Directive imple￾mented in Germany in July 2015 by the Deposit Guarantee Act Changes for all deposit guarantee schemes Member states had until 3 July 2015 to trans￾pose the provisions contained in the “new” EU Deposit Guarantee Scheme Directive 2014/49/ EU (DGSD) into national law. This was accom￾plished in Germany by means of the Act Imple￾menting the DGSD (DGSD-Umsetzungsgesetz). On the basis of this act, the DGICA, which im￾plemented the EU Deposit Guarantee Scheme Directive and the EU Investor Compensation Directive jointly, was split up into two separate acts: a Deposit Guarantee Act (Einlagensiche￾rungsgesetz) to implement the requirements imposed by the Deposit Guarantee Scheme Dir￾ective and a largely unchanged Investor Com￾pensation Act (Anlegerentschädigungsgesetz). 6 This means that repayment claims for securities transactions remain capped at 90% of the Funds can also be used for resolution and … … alternative measures Improved information and faster repayment Deposit guaran￾tee schemes can lend to one another across borders on a voluntary basis Deposit Guarantee Act and Investor Compensation Act: separate items of legislation 4 See Article 11 (1) and (2) of the Deposit Guarantee Scheme Directive. 5 For details, see Article 11 (3) of the Deposit Guarantee Scheme Directive. 6 The EU Investor Compensation Directive has not been reformed hitherto, so the broadly similar path followed by the two sets of legislation has been broken. The Investor Compensation Act will incorporate the current DGICA pro￾visions governing investor compensation without substan￾tively amending the existing legal status quo. Deutsche Bundesbank Monthly Report December 2015 52

liabilities from securities transactions and an equivalent value of €20,000. In order to statutorily ensure a comprehensive protection requirement, all credit institutions covered by the Capital Requirements Regula￾tion (CRR) have been required to join a statu￾tory deposit guarantee scheme since July 2015. Institutions will continue as before to be as￾signed by group of institution to statutory de￾positor compensation schemes for private and public banks. In addition, those institutions which had previously been exempted from membership of a statutory depositor compen￾sation scheme owing to membership of an in￾stitutional protection scheme are now also sub￾ject to a statutory obligation to compensate depositors. The Deposit Guarantee Act generally envisages two types of protection schemes in order to compensate depositors as required by law: – deposit guarantee schemes which repay de￾positors only if a bank has declared insolv￾ency (statutory compensation schemes) and – institutional protection schemes which focus on assisting member institutions and which can apply to be recognised as deposit pro￾tection schemes. No provisions governing possible cross-border lending to deposit guarantee schemes in other EU member states were incorporated into the Deposit Guarantee Act. The Deposit Guarantee Act sets forth general rules which are applicable to all deposit guar￾antee schemes with regard to statutory depos￾itor protection and also additional requirements which apply specifically to recognised institu￾tional protection schemes. In general, every depositor at a CRR credit institution has a legal right to repayment up to the limit on protec￾tion of €100,000, irrespective of where the CRR credit institution is grouped; this means that as of now, depositors of an institutional protection scheme have this legal right as well. The act defines as protected deposits credit balances, including time deposits and savings deposits, to be repaid by a CRR credit institu￾tion pursuant to the applicable laws and con￾tractual terms. Even foreign currency deposits are protected, although they will be repaid in euro. Since the directive has opened up the possibil￾ity of increasing the coverage amount for social welfare reasons, the Deposit Guarantee Act has envisaged an increase in the level of depositor protection to up to €500,000 for a period of up to six months after crediting of the amount provided the credited amounts are connected to certain major “life events” of the depositor such as those listed in the EU DGSD and are therefore deemed particularly worthy of pro￾tection. As envisaged by the directive, all deposit guar￾antee schemes governed by the Deposit Guar￾antee Act are required to raise, by 2024, avail￾able financial means of up to 0.8% of covered deposits by collecting contributions from the institutions belonging to the respective schemes. If a deposit guarantee scheme has used more than 0.8% of the amount of the covered deposits for payouts by the end of 3  July 2024, the period during which the respective deposit guarantee scheme must reach the target level shall be prolonged until the end of 3 July 2028. In order to identify the respective target funding amount, institutions are required to report once a year (starting at the 31 January 2016 reporting date) the amount of covered deposits as of 31 December of the previous year to the deposit guarantee scheme pursuant to the Deposit Guarantee Act.7 The Deposit Guarantee Act also opens up the possibility, envisaged in the directive, of fund￾ing up to 30% of the available financial means through irrevocable payment commitments. Broad statutory protection requirement and enlarged group of deposit guarantee schemes … … involving two types, … … but no provi￾sions governing cross-border lending Uniform per depositor level of statutory depositor pro￾tection at all CRR institutions Higher level of depositor pro￾tection for cer￾tain life events deemed worthy of protection Rules for raising financial means for the deposit guarantee scheme through regular contribu￾tions and … … irrevocable payment commitments 7 Such data have not yet been collected under the previous legal basis created by the DGICA. Deutsche Bundesbank Monthly Report December 2015 53

The EBA guidelines are also of relevance here. Under these guidelines, for instance, the pay￾ment commitments should be able to be rec￾ognised only if they are fully collateralised and the collateral is available to the deposit guaran￾tee scheme. The collateral shall consist entirely of low-risk assets and shall be unencumbered by any third-party rights. The protection schemes are entitled to levy a number of extraordinary contributions and extraordinary payments per accounting year. Extraordinary contributions are payments made to cover the funds required if a compensation event occurs, whereas extraordinary payments are used for the repayment of loans taken out to cover the required funds. There are, how￾ever, limits with regard to the amounts that can be demanded from contributory institutions. Each year, member institutions can be required to pay a maximum of 0.5% of their covered deposits as extraordinary contributions or extraordinary payments if accumulated funds prove insufficient to finance a current compen￾sation event. With the consent of the German Federal Financial Supervisory Authority (BaFin), the statutory deposit guarantee scheme can, in exceptional circumstances, demand higher extraordinary contributions in order to safe￾guard the functional viability of the compensa￾tion scheme. The deposit guarantee scheme may also borrow funds to cover temporary financing needs. The risk-based calculation of contributions stipulated in the directive, and which has now been made compulsory by the Deposit Guaran￾tee Act, has essentially already been imple￾mented in Germany, as the German protection schemes already have risk-based contribution systems in place. The EBA’s guidelines for risk￾based contributions drafted in accordance with the directive are to be implemented by the competent authorities by the end of 2015. They stipulate that 75% of the calculation base is to be constituted by compulsory, ie harmon￾ised, categories with predefined indicators, while the remaining 25% can be specified according to national criteria in order to take account of particular national requirements. In Germany, the details governing the levying of contributions are not set out in the Deposit Guarantee Act, but rather in a separate regula￾tion for statutory deposit guarantee schemes and in articles of association for recognised institutional protection schemes. The Deposit Guarantee Act shortens the repay￾ment deadline for depositor compensation from 20 working days at present to seven working days as of 31 May 2016, as required by the directive. While it is true that the Direct￾ive on Deposit Guarantee Schemes provides an option of incrementally reducing the repay￾ment deadline from 20 to seven working days over a ten-year period, in Germany it has been decided to switch over in a single step in the interest of enhancing depositor protection. The EU’s Directive on Deposit Guarantee Schemes gives member states the option of creating a legal basis that allows deposit pro￾tection schemes to also use their funds for sup￾port measures. On this basis, the German im￾plementing legislation allows officially recog￾nised institutional protection schemes to carry out such measures provided that they meet the requirements stipulated in the Deposit Guaran￾tee Act. A statutory deposit guarantee scheme also pro￾tects deposits held at branches of German in￾stitutions in other EU member states. While the deposit guarantee scheme of the host member state is responsible for administering the de￾positor compensation, the necessary funds are provided by the deposit guarantee scheme of the home member state before payouts are made. Similarly, compensation in Germany for deposits at branches of institutions from other EU member states is carried out in the name of the deposit guarantee scheme of the home member state. As there are several statutory deposit guarantee schemes in Germany, BaFin designates the deposit protection scheme responsible for settling the compensation Greater resili￾ence through extraordinary contributions and extraordin￾ary payments EBA guidelines for risk-based contributions Shortening of the repayment deadline Support for insti￾tutions possible under Deposit Guarantee Act Depositors at branches in other EU coun￾tries protected by Deposit Guarantee Act Deutsche Bundesbank Monthly Report December 2015 54

event. In most cases, this will be the Compen￾sation Scheme of the Association of German Banks (EdB). Changes affecting deposit guarantee schemes of private and public-sector banks The Deposit Guarantee Act retains the exist￾ence of two statutory compensation schemes, one for private-sector CRR credit institutions and one for public-sector CRR credit institu￾tions. The pre-existing statutory compensation schemes (EdB and EdÖ) can therefore continue to carry out their functions as “entrusted com￾pensation schemes”. BaFin assigns institutions to the relevant compensation scheme on the basis of the institution’s legal form. Upon request, BaFin can alter a credit institution’s assignment to a compensation scheme. The deposit guarantee schemes of private and public-sector banks must fulfil the provisions that have been transposed into German law on the basis of the new Directive on Deposit Guar￾antee Schemes, particularly those on compen￾sation and the accumulation and use of funds. On the whole, however, the changes in con￾nection with the new directive are relatively limited for this group of institutions, as they do not entail any major material changes to the deposit guarantee schemes. Changes to institutional protection schemes Up until now, institutional protection systems were classed as alternative systems and did not fall within the statutory framework of the DG￾ICA and were essentially exempt from its rules. Pursuant to the DGICA, they were, however, already subject to supervision by BaFin. Pursuant to the Deposit Guarantee Scheme Dir￾ective, all CRR credit institutions must join a recognised deposit guarantee scheme. For Ger￾many, this comprehensive statutory protection requirement means that institutions which are members of the voluntary protection schemes of the Sparkassen-Finanzgruppe (DSGV) or the Federal Association of German People’s Banks and Raiffeisen Banks (BVR) now explicitly fall within the remit of the Deposit Guarantee Act. The amended EU Deposit Guarantee Scheme Directive is therefore of special significance for institutional protection schemes in Germany. The existing institutional protection schemes, ie the DSGV and the BVR, had to decide whether to be recognised as institutional protection schemes within the meaning of the Deposit Guarantee Act or whether to fulfil the statutory depositor compensation requirements through separate, organisationally segregated struc￾tures. Both institutional protection schemes have been recognised as deposit guarantee schemes by the competent authority, BaFin, and are thus subject to full BaFin supervision pursuant to the Deposit Guarantee Act. Institu￾tions that belong to an institutional protection scheme which is recognised as a deposit guar￾antee scheme are exempt from being assigned to another statutory deposit guarantee scheme (section 24 (5) Deposit Guarantee Act). A recognised institutional protection system must provide identical depositor protection for all affiliated CRR credit institutions. Moreover, its organisation, financing and use of funds must comply with the statutory requirements. The basis of any institutional protection scheme continues to be its own articles of association, in which the requirements of the CRR and the Deposit Guarantee Act are implemented. In addition to the general requirements applic￾able to all protection schemes, additional legal requirements apply for the recognition of insti￾tutional protection schemes. The conditions necessary for liability arrangements, which pro￾tect the institutions and, where necessary, ensure their liquidity and solvency, must be fulfilled in accordance with Article 113 (7) of the CRR. Institutional protection schemes must Previous system used under DGICA to be maintained New provisions on the accumu￾lation and use of funds Institutional pro￾tection schemes hitherto not covered by the statutory framework All CRR credit institutions must join a recog￾nised deposit guarantee scheme Need for action on the part of existing institu￾tional protection schemes General legal requirements for institutional pro￾tection schemes Additional legal requirements for institutional pro￾tection schemes Deutsche Bundesbank Monthly Report December 2015 55

additionally provide “reasonable assurance” of the orderly performance of their tasks pursuant to the Deposit Guarantee Act, which means there must be at least two reliable and suitably qualified managers. Furthermore, a suitable supervisory body is required which is subject to the conditions of reliability pursuant to section 25d (1) of the German Banking Act (Kredit￾wesengesetz). The available funds must be administered and invested separately from the scheme’s other assets. Moreover, the institu￾tional protection scheme must dispose of suit￾able and uniformly regulated systems for the monitoring and classification of risk so as to enable a complete overview of the risk situ￾ations of all the individual members and the institutional protection scheme as a whole. In order to be able to react to a deterioration in the risk situation, the institutional protection scheme must be able to exercise influence over its member institutions. The articles of association must comply with the minimum statutory requirements stipulated in the Deposit Guarantee Act and include rules on the following points in particular: contribu￾tions, conditions for carrying out support meas￾ures, inspection rights, information rights and disclosure rights, conditions for and scope of forwarding the organisation’s own secrets and those of other parties, rules on potential bor￾rowing, rules on the transfer of funds to an￾other deposit guarantee scheme in the case of recognition being revoked, rules on the exclu￾sion of a member institution and rules on changes to the articles of association. Further￾more, liability arrangements must ensure that the institutional protection scheme can meet its obligations and provide the necessary sup￾port using funds that are readily available to it. On this statutory basis, a recognised institu￾tional protection scheme remains entitled to carry out measures to avert a going concern risk, particularly to ensure the liquidity and solv￾ency of a member institution. However, with regard to such support measures, the institu￾tional protection scheme is subject to new statutory requirements pursuant to section 49 of the Deposit Guarantee Act, including the following: – the resolution agency must not have under￾taken any resolution measures – the costs of the measures to avert a going concern risk may not, in principle, be higher than the costs that would be incurred by providing compensation for the covered deposits – conditions must be imposed which, at the very least, entail stricter risk monitoring and more extensive inspection rights for the pro￾tection scheme than under the previous pro￾visions – the funds used for support measures must be repaid, through extraordinary contribu￾tions where necessary, if depositors need to be compensated and funding equals less than two thirds of a statutory deposit guar￾antee scheme’s target level or if the avail￾able funds are less than 25% of the target level8 – BaFin must, following an evaluation, confirm the ability of the member institution to pay the required extraordinary contribution. Contributions raised by recognised institutional protection schemes must comply with the EBA guidelines, the provisions of which are to be implemented by the competent authorities by the end of 2015. The EBA guidelines stipulate that contributions are not only to be based on the level of covered deposits, but must also ap￾propriately take institutional risk into account. This accommodates the institutional protection schemes in particular, as their central institu￾tions, on account of their business model, gen￾Legally compli￾ant articles of association Support meas￾ures are possible under certain conditions Contributions based on the respective art￾icles of associ￾ation and in compliance with EBA guidelines 8 The target level, at 0.8% of covered deposits, is the same for all protection schemes and is to be achieved within ten years of the Deposit Guarantee Act entering into force. Deutsche Bundesbank Monthly Report December 2015 56

erally have only a relatively low level of covered deposits in relation to total assets. With regard to strengthening trust, it is to be welcomed that depositors at institutions that are members of a recognised institutional pro￾tection scheme will, in future, also have a statutory right to compensation for their deposits up to an amount, in principle, of €100,000, even though this right will not need to be exercised if the institutional protection scheme is invoked. However, as the member institutions of the institutional protection schemes still do not have a legal entitlement to receive support measures and a default on the part of an institution cannot be completely ruled out, the statutory right to compensation for depositors now in place represents a sub￾stantial improvement for the depositor. There￾fore, in principle, the same statutory deposit protection conditions apply to all deposit￾taking institutions in Germany. Implementation at the level of the individual associations The new Deposit Guarantee Scheme Directive and the Deposit Guarantee Act do not provide detailed requirements on how the parts of the new legal requirements specific to institutional protection schemes are to be implemented. The associations therefore have a certain de￾gree of flexibility. The requirements of Article 133 (7) CRR on the application of zero risk weights and on the non‑deduction of participating interests in other institutions within the same institutional protection scheme stipulate that the institu￾tional protection scheme must be able to grant support necessary under its commitment using funds readily available to it. In addition, the in￾stitutional protection scheme must be able to monitor risks and take influence. With regard to risk management of the institu￾tional protection schemes, Article 113 (7) CRR requires uniformly regulated systems for the monitoring of the classification of risk, which should provide a complete overview of the risk situations of all the individual members and the institutional protection scheme as a whole. In order to be able to react to a deterioration in the risk situation of member institutions, the CRR foresees possibilities to exert influence. Due to their differing situations, the associ￾ations were faced with different challenges in terms of fulfilling the new statutory require￾ments to be recognised as institutional protec￾tion schemes. The previous structure of the BVR’s institutional protection scheme consisted of a guarantee fund and a guarantee network (BVR protection scheme). In order to set up a system recog￾nised as an institutional protection system, the BVR set up a separate company as a wholly￾owned subsidiary (BVR Institutssicherung GmbH, hereinafter referred to as BVR-ISG) with the aim of operating a recognised institutional protection scheme. BVR-ISG is operated in par￾allel to the BVR protection scheme with largely similar structures (hence the term “dual protec￾tion system”). The BVR protection scheme is still operated in its original form as an institu￾tional protection system at the level of the association, but without official recognition. BSV-ISG has an opening balance of funds pro￾vided by the BVR protection scheme. Its funds must be accumulated in accordance with the requirements of the Deposit Guarantee Act by 2024. A liability arrangement between the BVR protection scheme and BVR-ISG ensures that the funds of the BVR protection scheme are also readily available to BVR-ISG. Membership in the BVR-ISG exists in parallel to membership in the BVR protection scheme. All domestic CRR credit institutions that are mem￾bers of the BVR and the BVR protection scheme are also members of BVR-ISG. Accession takes place via a special declaration of accession and commitment. Recognised insti￾tutional protec￾tion schemes provide a statu￾tory right to compensation Existing institu￾tional protection schemes can choose their own implemen￾tation method Liability arrangements pursuant to Article 113 (7) CRR a prerequisite Previous and amended structure of the BVR protection scheme (“dual protection scheme”) Funding of the BVR-ISG Members of BVR-ISG Deutsche Bundesbank Monthly Report December 2015 57

In contrast to the liability structure of the BVR, which was already centralised, the institutional protection scheme of the Savings Bank Finance Group undertook changes, on account of its decentralised and regional structure, to meet the requirements of a uniformly run system. This concerns, in particular, the decision￾making framework necessary for support meas￾ures within the regional protection schemes. The members of the DSGV adjusted the protec￾tion scheme of the Savings Bank Finance Group in May 2015 to bring it into line with legal requirements. The principle of institutional pro￾tection for all German savings banks, Landes￾banken and state building and loan associ￾ations has been retained in this process. The function of institutional protection continues to be assumed by the existing protection schemes of the Savings Bank Finance Group. However, as required by the Deposit Guarantee Act, the previous institutional protection scheme is being supplemented with a deposit protection function. In the case of a compensa￾tion event, the DSGV will perform the protec￾tion function centrally for the entire group. Under the institutional protection schemes rec￾ognised in Germany, member institutions do not have a legal right to receive support meas￾ures. Although the provisions of the Deposit Guarantee Act do not provide member institu￾tions with an enforceable legal right to receive support, the private-law articles of association of the respective association do, however, con￾tain support commitments in the context of in￾stitutional protection that stress the associa￾tion’s mandate of solidarity. However, a new aspect for institutional protection schemes is that support measures within the statutory framework can only be granted if the afore￾mentioned conditions of section 49 of the Deposit Guarantee Act (see page 56) are met. Outlook: deposit protection and banking union The “five presidents” of the various European institutions presented a report in May 2015 containing objectives for the completion of economic and monetary union. Among other things, it called for the creation of a common European Deposit Insurance Scheme (EDIS). The European Commission has since added fur￾ther substance to this objective and presented a roadmap with a step-by-step approach to implementing EDIS. According to this road￾map (see the box on page 59), the European deposit insurance scheme would begin as a re-insurance system for national insurance schemes as of 2017 and enter a co-insurance phase as of 2020, by which time the share of contributions and possible compensation pay￾ments borne by EDIS would increase each year. As of 2024, EDIS alone would be responsible for covering all compensation events. The pro￾posal of the European Commission builds on the idea of creating a banking union, according to which the common deposit insurance scheme would constitute the third pillar along￾side the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The European Commission’s rationale for EDIS is to be better able to contain, in a European context, the effects of economic shocks that affect one country and overwhelm its national deposit guarantee scheme. EDIS is also in￾tended to reduce the dependence of banks on the economic situation of their respective country. Overall, through this approach, it is hoped that the trust of depositors in the secur￾ity of deposits in a European context will be strengthened. However, important preconditions for a Euro￾pean deposit insurance scheme are not yet met. Further steps towards integration in Eur￾ope are necessary before a European deposit insurance scheme can be created. A key precondition for a common deposit insurance scheme is de-risking at banks. In Institutional pro￾tection scheme will continue with a decen￾tralised structure Recognition of the Savings Bank Finance Group’s protection scheme Compensation function central￾ised within the DSGV for the entire group Member institu￾tions do not have a legal right to receive support measures Deposit protection as the “third pillar” of the banking union De-risking at banks necessary Deutsche Bundesbank Monthly Report December 2015 58

European Commission’s plans for a European Deposit Insurance Scheme The European Commission published a pro￾posal to amend the Single Resolution Mech￾anism (SRM) Regulation on 24  November 2015. This outlines a European Deposit Insurance Scheme (EDIS), to be established in three sequential stages. The fi rst stage would be a re- insurance scheme from 2017 to 2019, followed by a co- insurance stage from 2020 to 2023 and, fi nally, full insurance from 2024 onwards. In the third stage, a central fund is to be cre￾ated which would ultimately assume the full deposit protection function for all mem￾ber states participating in the Single Super￾visory Mechanism, or SSM. In the full insur￾ance phase from 2024 onwards, it is envis￾aged that the national deposit guarantee schemes, which have been established in line with the EU Deposit Guarantee Schemes Directive up until now, will cease to func￾tion independently. The share of the institu￾tions’ contributions to the national guaran￾tee schemes – which have received all of the resources up until now – would grad￾ually decrease over the individual stages, while the contributions to the common EDIS fund would increase correspondingly. As the European- level fund grows, the fi nancial contributions to be made by EDIS, too, would rise steadily during the fi rst two stages. If compensation needs to be paid out during the fi rst stage of “re- insurance”, the national fund would be fi rst in line to cover these compensation payments. Once the compensation funds at the national level have been fully depleted, EDIS would, during this stage, provide liquidity of up to a maximum of 20% of the refund costs, and the national guarantee schemes would have to pay back these funds to EDIS. According to the European Commission’s plans, in the second stage (co- insurance), the national deposit guarantee schemes would only have to pay part of the com￾pensation from their own funds before seeking EDIS funding. There would thus be a gradual introduction of risk- sharing across all participating states. In the fi nal phase, it is assumed that risks will be shared in full among all participating member states. In this phase, all compensation cases in the participating states would be paid out via EDIS. The European Commission’s plans envisage that the Single Resolution Board, or SRB, which has already been established at the European level, should assume re￾sponsibility for implementing European deposit protection, in the form of EDIS, together with the participating national de￾posit guarantee schemes (or the authorities designated responsible for administering the participating deposit guarantee schemes). Participation would ultimately be compul￾sory for all euro- area member states, while the idea is that non- euro- area member states could voluntarily participate in the SSM and thus automatically enrol in the SRM and the common European Deposit Insurance Scheme. Deutsche Bundesbank Monthly Report December 2015 59

addition to the supervisory rules that have already been adopted, abolishing the preferen￾tial supervisory treatment of sovereign expos￾ures could also make a significant contribution in this regard, as it would help make the eco￾nomic situation of banks less dependent on the situation of their respective home country. Otherwise, were the home country to default, there would be a danger of the direct eco￾nomic fallout being communitised under EDIS via the direct effects on national banks. Ultim￾ately, there would be a danger that the deposit guarantee scheme would, indirectly via this contagion channel, be made liable for the sov￾ereign debt of other countries. Another key point is insolvency law. Rules gov￾erning corporate or personal insolvency have direct consequences for the risk situation of banks and the burden that creditors must bear in the event of insolvency. If a common Euro￾pean deposit guarantee scheme were to be set up without the requisite preconditions being in place, the consequences of insolvency regimes that favour the national private sector over creditor banks could, for example, be commu￾nitised. Barriers to rapid compulsory enforce￾ment by lenders are an example of such favour￾able treatment. Differences in the speed of integration would obviate the alignment of liability and control, which is necessary for rational economic decision-making. Significant steps are still needed in order to prevent false incentives and undesirable economic conse￾quences. Until these steps have been taken, a common European deposit insurance scheme must be rejected. The European Commission also sees dangers in its plan and highlights the necessary steps that must be taken in advance, such as de-risking at banks, the harmonisation of insolvency law and the implementation of the Bank Recovery and Resolution Directive (BRRD) in all member states. The implementation of this directive across all EU countries would reduce the likeli￾hood of the deposit insurance scheme being called upon, as it increases banking supervisors’ powers of early intervention if institutions ap￾pear to be at risk and strengthens the position of covered deposits because of the bail‑in rules for other liabilities. The European Commission also points out the need for the Deposit Guar￾antee Scheme Directive to be implemented in all member states and for the national target amounts to be attained in conformity with the directive. It is therefore important that the steps taken are made in the correct order, ie that all necessary preconditions are in place before a common deposit insurance scheme is created and that the objective of stability is not jeopardised by an ambitious timetable for cre￾ating a common deposit insurance scheme, which could run counter to this objective. Harmonisation of insolvency law required in the individual member states Deutsche Bundesbank Monthly Report December 2015 60