Member Article

On the 24th of April 2024 the European Parliament (hereunder the ‘EP’) adopted the Proposal for the amendments to the Directive 2014/49/EU as regards the scope of deposit protection, use of deposit guarantee schemes funds, cross-border cooperation and transparency (the Directive hereunder referred to as the ‘DGSD’). The EP adopted the proposal with additional amendments to be assessed in line with the applicable European legislative process and, hence, the text is not final. These amendments are part of the proposed European package amending the framework on banks’ crisis management [1].

One of the concepts considered under the DGSD is that of a “Deposit Guarantee Schemes” (hereunder the ‘DGSs’ and individually as ‘DGS’). DGSs reimburse an amount to compensate depositors whenever a credit institution has failed. The fundamental principle underlying the creation of DGSs by the European Union is that the amounts to be compensated to the respective depositors are funded entirely by credit institutions, and that no taxpayer funds are utilised. DGSs protect depositors’ savings by guaranteeing deposits of up to €100,000 per account holder (irrespective of the number of accounts held by that depositor with a failed bank). The principal aim of this system is to help prevent a mass withdrawal of deposits in the case of a bank failure, which could in turn create further financial instability.

Brief Overview of the Proposed Amendments to the DGSD

At present, financial institutions are excluded from the scope of the DGSs in terms of Article 5 of the DGSD. The proposal includes a new article (Article 8b) which will include within the DGSs the funds of clients deposited in bank accounts for safeguarding purposes by financial institutions (including e-money institutions and payment institutions). In such case, the deposits are placed on behalf and exclusively for the account of clients who are eligible for protection in accordance with Article 5 and such deposits will be protected if the underlying clients can be identified or are identifiable.

With reference to the methods of payment of compensation to depositors, it is being proposed that depositor reimbursements via credit transfers be the default payout method when reimbursement exceeds the amount of € 10,000. This amendment is being proposed to dovetail with the objectives of the European Union framework on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing. Also in relation to the latter objective, it is being proposed that when compensating depositors, DGSs are to withhold the payout when they are notified that a financial intelligence unit in a Member State has suspended a bank or payment account in line with the applicable anti-money laundering rules.

In relation to the temporary high balance provisions in the current Article 6 of DGSD, changes are being proposed to change the protection to a minimum amount of at least €500,000 and a maximum of €2,500,000 for a harmonised duration of six months, in addition to the standard coverage level of €100,000. With reference to real estate transactions to private residential properties and deposits intended for these transactions, the transactions will need to be concluded in a four-month period by natural persons and such persons would be required to provide documentation to prove these transactions.

Article 9 (related to claims against DGS) of the current DGSD does not distinguish between a DGS’s contribution when an open-bank bail-in tool is utilised and DGS’s contribution to the financing of a transfer strategy (sale of business or bridge institution tool) followed by liquidation of the residual entity. In such case, the proposed amendments include, inter alia, that the DGS shall have a claim against the residual entity in its subsequent winding-up proceedings under the respective national law. It is being proposed that the claim shall rank at the same level as covered deposits under national law governing normal insolvency proceedings.

The proposal, and consequently, the DGSD, also includes requirements considering preventive measures [2] in relation to a specific note that is required to be presented to the competent authorities. In such case, credit institutions are to be required to present to the competent authorities a note outlining the measures that they commit to undertake. The proposal includes details to be inserted in this note such as capital raising measures, liability management exercises and capital generating sales of assets (just to mention a few requirements). It is also being proposed that credit institutions are to provide the competent authorities with a business reorganisation plan to secure long-term viability within a reasonable period of time. In such instances, the European Banking Authority (hereunder ‘EBA’) is to issue guidelines to assist credit institutions to draft these business reorganisation plans.

The proposal also includes a number of requirements in relation to the calculation of what is termed in the DGSD as the “least cost test”. This test involves a number of steps, including the verification that the cost to finance the selected measure is lower than the cost of reimbursement of covered deposits. Moreover, it is being proposed that the EBA is to develop draft regulatory technical standards on the methodology to calculate the cost of different DGS interventions and to ensure consistency of the methodology for the least cost assessment with the DGS statutory or contractual mandate.

The proposed changes also include further requirements on DGSs on cross-borders payouts, as well as further provisions to enhance the cooperation between Member States in cases where credit institutions operate through passporting rights within the European Union. It is also being proposed that the EBA be mandated to issue guidelines to assist the DGSs in such cooperation, inter alia by suggesting a list of conditions under which a DGS of the home Member State may decide to reimburse depositors at branches located in host Member States.

In relation to cross-border services, it is also being proposed that branches of credit institutions established in third countries shall be required to join a DGS in a Member State if they wish to provide banking services and take eligible deposits in the European Union. Furthermore, a new article is being proposed to stipulate that DGSs “do not cover depositors at branches that have been set up in third countries by their member credit institutions, except where, subject to the approval of the designated authority, those DGSs raise corresponding contributions from the credit institutions concerned”.

The full text of the proposal may be accessed through this link: https://www.europarl.europa.eu/doceo/document/TA-9-2024-04-24_EN.html

Footnotes

[1]  This legal insight will not cover the proposed amendments to the Directive 2014/59/EU as regards early intervention measures, conditions for resolution and financing of resolution action.

[2] Preventive measures are those measures that are intended to intervene before bank failure occurs, for safeguarding of depositors in general as well as promoting financial stability.

This document does not purport to give legal, financial or tax advice. Should you require further information or legal assistance, please do not hesitate to contact Dr Michael Psaila or Dr Sarah Zerafa Lewis.

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