Bank customers are set to enjoy enhanced protection should their bank go bankrupt. In virtue of a recent proposal made by the European Commission, changes are being envisaged to current EU laws which already guarantee that consumers do not remain in the lurch should their bank fails.

EU law has, since 1994, obliged member states to have deposit guarantee schemes in place. The objective of deposit guarantee schemes is to soften the blow for consumers whose banks have failed by guaranteeing the reimbursement of a limited amount of deposits to depositors. Indeed, the advantages accruing from such a measure are two-fold.

From the depositors’ point of view, such a scheme is set to protect a part of their wealth from bank failures. From a financial stability perspective, it prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences.

Last year, the EU reacted to the financial rut that most banks and consumers found themselves in by increasing the EU-wide deposit guarantee scheme to up to € 50,000 by June 2010, with the possibility of raising the ceiling to €100,000 by the end of the year.

The current proposal now confirms that the coverage level of such a scheme in all member states must be that of €100,000 per depositor per bank. This means that the limit of €100, 000 applies to all aggregated accounts of one account holder at the same bank, be they current accounts, savings accounts or any other accounts in any one bank.

All deposits held by individuals and small, medium-sized and large businesses must now be protected. The new proposals are hence expanding the scope of coverage of EU deposit guarantee schemes since some EU member states, including Malta, excluded large enterprises from claiming under the scheme. Deposits of financial institutions and public authorities will still not be covered.

The proposal also extends coverage to deposits in all currencies, that is, even to deposits in non-EU currencies.

Current rules regulating deposit guarantee schemes make it obligatory on the scheme to effect pay-outs to account holders within three months after a bank failure. By the end of 2010, this delay has to be reduced to between four and six weeks. The proposed law now shortens the pay-out delay to one week.

Banks will be required to mark eligible deposits in their books and to maintain up-to-date records. If a bank fails, no application from bank account holders will be needed and the scheme will pay out automatically.

The new financing requirements will ensure that each scheme has enough funds in place to deal with a medium-sized bank failure. Indeed, all deposit guarantee schemes must have 1.5 per cent of eligible deposits on hand by 2020. Banks will therefore have to pay on a regular basis to the schemes, in advance, so that an amount of money can be put aside for rainy days.

The contributions made by the individual banks will be calculated according to their risk profiles, taking into account factors such as capital adequacy, asset quality, profitability and liquidity. Banks having a riskier business model than others will pay higher contributions to deposit guarantee schemes.

The fact that these proposals are set to offer better financial protection to EU citizens cannot be denied. Nonetheless, neither can the additional burden which will be imposed on banks, still striving to recover from a severe financial crisis, be underestimated. The fact that the proposed rules are making provision for a 10 year transition period for member states to reach the stipulated target funding levels may serve to somewhat soften the blow for the banking industry.

Perhaps, EU banks may be somewhat solaced by the fact that the proposed measures are intended to ensure a level playing field and to harmonise as much as possible an area of law which, so far, had left much to the discretion of the individual member states.

mariosa@vellacardona.com

Dr Vella Cardona is a practicing lawyer and a freelance consultant in EU, intellectual property, consumer protection and competition law. She is also a visiting lecturer at the University of Malta.

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