EU tightening grip on banksto protect customers’ deposits

Bank customers everywhere in the EU are to be offered cover of up to €100,000 for their deposits if their bank goes bust in future. They will also be reimbursed within seven days of the bank going into liquidation, under new rules proposed by the European Commission.

The changes, part of an overhaul of a directive on deposit guarantee schemes – the safety nets banks must put in place to repay depositors in the event of a failure – are to come into force in 2012, but the funds do not have to be up and running until 2020.

In another new proposed directive (on investor compensation), the Commission is proposing that investors will be paid back up to €50,000 should their money be used fraudulently or be lost in a future crisis.

“We don’t want to await a new Madoff case to have better protection for investors in Europe,” the EU’s Internal Market Commissioner Michel Barnier said when revealing these proposals which now have to be approved by member states and the European Parliament.

According to the proposals, investors under the new scheme will be protected even if a third party custodian holding their assets goes bust.

“This is a credible system of ex ante funding by banks themselves,” Commissioner Barnier said.

“This is an additional effort required of banks and these proposals are necessary to guarantee consumer confidence,” he said.

The EU executive wants to eliminate what it says is a “fragmented” network of over 40 national schemes that offer investors and depositors varying levels and sometimes no compensation. It wants to avoid a repeat of the situation in late 2008 when customers pulled their money from UK banks in favour of their Irish counterparts to avail of a Dublin-backed blanket guarantee on deposits.

The new rules will also cover companies, and will be especially helpful for smaller businesses, which saw some of their deposits go down the drain because of differing rules across the bloc.

According to Commission estimates, the deposit guarantee scheme will cover 95 per cent of eligible accounts in the EU. The rules state that banks giving out riskier loans will have to pay up to three times more into their schemes to make sure depositors are covered.

The deposit guarantee schemes are to be funded by banks themselves, which will have to hold back 1.5 per cent of their cash deposits after ten years. If this proves to be insufficient to cover losses in the event of a future crisis, they will have to find cash worth a further 0.5 per cent of deposits. The schemes will also be able to borrow from other similar schemes across the EU if cash runs short, a loan that will have to be repaid within five years.

The draft proposal says that banks must also make “alternative funding arrangements” as a “last line of defence against taxpayers’ involvement”.

For investor schemes, the Commission has yet to specify a target amount of funding, which will be set out in further legislation. However, it does indicate the money will have to be saved up before another crash occurs (ex ante), with the possibility to top it up if the need arises.