New German deposit insurance

The German government adopted a package of measures Wednesday at a cabinet meeting in Berlin aimed at ensuring depositors' savings are better protected if a German bank fails.

The measures responded to a European Union directive passed in June, requiring each EU member country to create a deposit insurance fund for the nation's banking sector. The directive specifies that each nation's fund must set aside an amount corresponding to at least 0.8 percent of total bank deposits covered by deposit guarantees.

The deposit insurance fund is to be brought up to the required level over the coming ten years, i.e. by 2024.

It's part of a wider effort to renovate the European banking system to achieve greater safety and stability in the wake of the problems since the 2008 financial crisis, which was generated by irresponsible banking practices. Europe-wide banking regulation - rather than purely national regulation - is key to that effort.

Deposit insurance provides stability to banks

A statement by the European Commission explained that "Deposit Guarantee Schemes" reimburse money in bank accounts to depositors whose bank has failed. Since 2010, the EU has required that each country insure at least the first 100,000 euros of a bank client's savings deposits.

Amounts above that are not covered by deposit insurance. EU member countries are in principle free to adopt deposit insurance rules covering more than the first 100,000 euros, but to date, none have done so.

Deposit insurance schemes are crucial to prevent "bank runs" - situations in which large numbers of savers rush to withdraw their savings from a given lender if news or rumors suggest the bank's solvency is at risk.

In the era before deposit insurance - in the 19th century - even healthy banks sometimes failed when false rumors got going that a bank was at risk of insolvency.

"From the depositors' point of view, this [deposit insurance] protects a part of their wealth from bank failures. From a financial stability perspective, this promise prevents depositors from making panic withdrawals from their bank, thereby preventing severe economic consequences," the Commission noted.

Speed is of the essence

For depositors who have more than 100,000 in savings at a European bank, a low-risk strategy to avoid the risk of losing money in the event of a bank failure is to maintain accounts at different banks.

But for all depositors, and perhaps especially for those who have little in the way of savings, it is also important to be able to access their insured bank deposits quickly if and when their bank has failed. A failed bank may spend months in bankruptcy administration, and cease to operate. Under such circumstances, most people cannot afford to wait for ages to regain access to their often meager savings.

For that reason, the EU sets requirements that insured deposits must be accessible for depositors within a specified time frame. Under EU rules, payout dealines must be gradually reduced from 20 working days presently, to 7 working days as of January 1, 2024.

Again, however, national banking authorities are free to adopt stronger measures - or to meet the 7-day payout deadline earlier than the 2024 deadline required by the EU Commission.

And that's what Germany has done in its draft Einlagensicherungsgesetz, or deposit insurance law. Starting May 31, 2016, the maximum time frame allowable for depositors to be paid out their insured savings will drop from the current 20 working days to seven working days.

In addition, certain categories of savings deemed worthy of special protection will gain a higher deposit insurance cap. The basic protection will remain limited to 100,000 euros per person in a bank failure. But in special circumstances - for example, in cases where someone has just sold a house, and the proceeds are on deposit at a bank which then fails - the deposit insurance will cover up to 500,000 euros.

That will provide some comfort for people whose life's savings are mostly tied up in home ownership.

nz/hg (Reuters, dpa)