EU regulations help insure banks in the region, but is this enough?
Against this backdrop, a fundamental question lingers in the back of every small depositors mind: “ is my money safe?”
The short answer is “yes.” Very safe.
However, for people like our grandmothers who stuffed cash under their mattresses, we need to provide a few more assurances. Fortunately, in the newest member countries of the EU, assurances and action come hand in hand - as the banking principles are embedded in the relevant EU rules and the institutions have been put in place to implement these.
Let me start with the basics.
Under EU rules, every member state is obliged to have a deposit insurance fund typically maintained by a deposit insurance agency. In Romania this is called the Fondul De Garantare a Depozitelor in Sistemul Bancar (FGDB), in Poland it is the Bank Guarantee Fund (BGF), and in the EU’s newest member state, Croatia, it is the State Agency for Deposit Insurance and Bank Rehabilitation (DAB). These all basically serve the same function - that is to keep our money safe. The question, then, is how do they do this?
Under the current framework, each bank that operates within the EU’s common market is mandated to contribute certain fees into a fund that is held by the Deposit Guarantee Scheme (DGS) in each country. These collective contributions are then held in very liquid investments - ensuring that, should a bank fail, these funds can be paid out to depositors within 20 working days.
The new Directive on DGS’s, now in effect ensures that deposits of less than Euro 100,000 in a bank that fails will be paid within 7 working days. The limit of €100,000 essentially covers 95% of EU citizens. Those that have more than €100,000 are considered “high net worth individuals” and are typically financially sophisticated enough to have a diversified investment strategy of safeguarding their money (for example, maintain deposits in several banks, invest in mutual funds etc.).
Furthermore, in the case that a person has just sold a house (or if any other so called “lifetime event” have occurred which resulted in having more than €100,000 in one’s account) the new Directive calls for higher coverage for a limited amount, allowing time to properly invest this windfall.
Seven days you say? How is it possible that millions of account holders can be identified and paid out in such a short time?
Financial sectors have composed of a number of “financial safety net players” working around the clock to ensure the stability of the system. Bank failures don’t typically happen overnight and the main task of regulators is to monitor banks, with special attention to banks showing deteriorating statements. Among others, regulators require banks to identify the accounts that would be eligible in the event of a failure. DGS have special software to identify individual accounts and calculate the insured deposits in the event of a failure. Furthermore, money is immediately returned directly to you from the DGS – requiring no special application in the process.
Does the DGS in my country have enough money?
The needs of a financial safety net change over time and, thus, there are several avenues for a DGS to ensure that it has enough money at every circumstance. Since they collect fees from Banks, there is a steady revenue flow that can be used to borrow money when the need to expand the safety net arises. This money can be borrowed from the Government, from financial markets or, also from the World Bank. Additionally, DGS have the right to borrow money from another DGS in the EU. This broad access to funds is designed to ensure the financial sector remains stable, which is key in a globally interconnected system. So, in principle, no taxpayer money is used to insure your deposits or those of your family.
So what changes under the new Banking Union?
Under the new set up, Deposit Guarantee Schemes in the member states will work as an extended, happy family. The cooperation between the different Schemes has been strengthened (e.g., on sharing of information and best practices). This is important because if a foreign bank branch fails, the DGS of the country were the bank is anchored (which insures our money) will work together with the DGS in our country to make sure we will receive our money quickly.
Does it always work?
It should always work, but as this summer in Bulgaria proved the weather is sometimes not as sunny as one wished for it to be. Two bank failures and major problems with returning the deposits which resulted in angry depositors protesting weekly in Sofia showed that it does not only take solid and clear rules and policies. The European Commission has reacted, but the system has clearly failed.
Lessons learnt? It is probably too early to list any, but what I would say is that even the best procedures are not enough - the key is to undertake timely and adequate action.
What can the World Bank do to make sure that the money your aunt Ivana saves from her sewing business stays safe?
In addition to providing backstopping facilities to DGS mentioned earlier, the World Bank offers products aimed at ensuring financial safety nets are robust. First, the Bank can help to carry out crisis simulations, which can point at weaknesses in bank resolution frameworks. In this context, the Bank also brings the best and most relevant international experience to the authorities on how these weaknesses are fixed. Second, upon the invitation of the supervision authorities or DGS agencies (most recently in Romania and Croatia), the Bank carries out independent assessments of these agencies - evaluating their compliance with core international standards. Finally, the Bank also contributes to this agenda by bringing the voice of countries, and their small savers, to international fora - helping to ensure their interest are heard and safe guarded.
So, the next time you hear of some bank having trouble, don’t rush to get your money out - the institutions are probably already working to keep deposits safe and ensure you have access.
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