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CEBS Technical Advice on Deposit Guarantee Schemes

Core Content and Overview

The CEBS technical advice was requested by the European Commission to review aspects of the Directive on Deposit Guarantee Schemes, particularly focusing on coverage levels, definitions of deposits, topping-up arrangements, and the division of responsibilities between home and host countries. The review is required by Article 7(5) of the Directive, which mandates a reassessment of the coverage level five years after the end of the transitional period (31 December 1999).

CEBS concluded that, at this stage, the current regime does not require significant amendment. However, the evolving EU banking framework, including the CRD and Basel II, as well as the increasing complexity of cross-border banking, may necessitate future changes. CEBS emphasized that the current diversity of deposit guarantee schemes does not necessarily hinder financial integration and that any reform should be carefully considered to avoid disproportionate costs or legal complications.

Main Issues and CEBS' Views

A. Home/Host Responsibilities and Crisis Management

• Current Practice: In the EEA, deposit protection levels and scopes differ across Member States. Cross-border branches typically participate in the host country scheme, while subsidiaries follow the home country principle.
• Topping-Up Arrangements: These allow cross-border branches to supplement their home coverage with host coverage, but they may create mismatches between supervisory and deposit guarantee responsibilities.
• CEBS' Stance:
  • Option 1a (Retain current regime): CEBS prefers to keep the current home/host arrangement, as it functions reasonably well in practice.
  • Option 1b (Home-based topping-up): While theoretically appealing, this may lead to legal complications and differences in customer treatment.
  • Option 1c (Abolish topping-up): This could reduce competitive distortion but may not fully address it and could increase heterogeneity.
  • Option 2 (Host-based system): Would create divergence between deposit guarantee and prudential architecture, which CEBS considers undesirable.
  • Option 3 (Pan-European scheme): CEBS believes this is too early to consider due to fiscal and supervisory challenges.

B. Level of Coverage

• Current Minimum: The Directive sets a minimum coverage of €20,000 per depositor.
• Practical Dispersion: Actual coverage levels vary, with some Member States offering higher protection and others still in transition.
• Coverage vs. Scope: While coverage levels are reasonably homogeneous, differences in the definition of deposits can significantly affect the effective level of protection.
• CEBS' View:
  • Greater harmonisation of coverage is desirable but not yet feasible without addressing other elements such as set-off clauses.
  • The current level of coverage is adequate, covering 60–70% of household deposits in the EU15, and a moderate increase is unlikely to result in significant moral hazard.

C. Definition of Deposits

• Scope of Protection: The definition of deposits significantly impacts the level of protection offered. Some schemes cover only transaction accounts, while others include a broader range of financial instruments.
• Objectives: CEBS notes that deposit guarantee schemes are used not only for financial stability but also as a consumer protection tool.
• CEBS' View:
  • A common definition of deposits should include both transaction and non-transaction accounts.
  • Harmonising the scope is more fundamental and feasible than harmonising the coverage limit.

D. Topping-Up Arrangements

• Usage: Topping-up arrangements are rare and have limited practical experience, as cross-border retail banking has been mainly conducted through subsidiaries.
• Challenges:
  • Legal issues such as counterclaims and set-off rights complicate the process.
  • Delays in compensation can occur if topping-up is not implemented effectively.
• CEBS' View:
  • Topping-up has not yet demonstrated a clear need for reform.
  • It may be useful in specific cases, such as when host countries offer broader coverage than home countries.
  • CEBS recommends caution in implementing such arrangements due to the lack of experience and potential legal hurdles.

E. Financing of Schemes

• Funding Models: Most schemes are ex ante or mixed, with pure ex post schemes being less common.
• Public Support: All schemes are ultimately supported by public funds, either explicitly or implicitly.
• CEBS' View:
  • The distinction between ex ante and ex post funding is not always clear in practice.
  • CEBS acknowledges the need for further analysis on how different funding models affect the stability and efficiency of deposit guarantee schemes.

Key Takeaways

• The current deposit guarantee regime is functioning reasonably well and does not require immediate reform.
• Topping-up arrangements are not widely used and may introduce legal and supervisory complexities.
• Harmonisation of the level of coverage is desirable but must be considered alongside other elements such as set-off clauses.
• A broad definition of deposits is more appropriate for consumer protection and financial stability.
• CEBS supports maintaining the existing home/host arrangement, with a preference for national coordination over a pan-European scheme.
• Information exchange between supervisors and deposit guarantee schemes is currently effective and does not require immediate changes.