The German economy is the largest in Europe. This highly developed social market economy is supported by different financial institutions with distinct risk profiles based on the type, size, nature and scope of its activities. Over 1.600 licensed credit institutions are supervised by a robust legal and regulatory framework to protect the public interest. Under the provisions of the European Capital Requirements Regulation (CRR), German credit institutions are subject to oversight of the Single Supervisory Mechanism (SSM). Other financial institutions in Germany are supervised by their respective national authorities. Furthermore, the supervision of systemically important financial institutions is, due to their impact on the European financial system, overseen by the European Central Bank (ECB) in collaboration with Joint Supervisory Teams (JST).
Banks in Germany are stable, financially sound and well-managed. However, the recent moratorium and insolvency proceedings of Greensill Bank AG reveal that institutional failure may occur. The way BaFin, the Federal Financial Supervisory Authority, handled the corporate dissolution and repayment of an estimated 2.7 Billion Euro to account holders clearly demonstrates the comprehensive and efficient deposit protection frameworks.
In Germany, the banking industry is segmented into private commercial banks, public savings banks, and cooperative banks. Lawmakers, trade organizations and industry associations have adopted different bank-financed institutional, statutory and voluntary deposit guarantee schemes. The result is a protective system that supports the financial institution with liquidity to avoid its failure, provides account holders with deposit insurance between up to 100.000 euro (in exceptional circumstances raised to 500.000 euro), and an extra layer of protection maximized at 8,75% of the liable capital of the bank. The latter is subsidiary to the liability of first level of statutory compensation. It is not guaranteed and subject to the voluntary membership of the scheme and the articles of association of the scheme.
Different DGS Funds to Achieve One Overall Objective
Statutory guarantee schemes offer a legal entitlement for eligible bank account holders to compensation not exceeding € 100,000 per depositor and bank, including any interest claims. In addition, deposits considered particularly worthy of protection have a higher level of protection of up to € 500,000 for a period of up to six months following the crediting of the deposit amounts. Among these funds are deposits from private real estate sales as well as claims on social grounds. Compensation claims must be submitted no later than seven working days after the compensation event has occurred. The statutory deposit protection scheme covers not only sight, time and savings deposits, but also registered savings bonds. Deposit protection schemes are financed by a collection of annual, risk-based contributions from their member institutions.
In addition to the statutory deposit guarantee schemes, there are voluntary deposit insurance schemes maintained and operated by the Federal Association of German Banks (BdB) and the Association of German Public Sector Banks (VOB). The voluntary insurance schemes guarantee deposits only if they are not already covered by a statutory compensation scheme. Compensation is not a legal right. Private individuals, partnerships, and foundations are protected from financial loss by the voluntary deposit guarantee fund operated by the BdB. These include sight, time, and savings deposits, as well as registered savings bonds. The coverage limit is 15% of a member bank’s own funds. Deposits of individuals, business enterprises and municipalities are protected by the voluntary deposit guarantee fund operated by the VOB. this protection extends to deposits exceeding the statutory maximum of €100,000.
Legal Basis, Procedures and Claim Eligibility
Deposit taking and credit institutions are required by law to secure client deposits by joining a local deposit guarantee scheme. The legal basis of bank deposit protection is implemented in German national law by the Deposit Insurance Act (EinSiG) following EU directive 2014/49/EU. The statutory scheme is executed by the Compensation Scheme of German Banks GmbH (EdB), whilst the Federal Association of German Banks (Bankenverband) provides a voluntary deposit insurance fund with a higher level of protection above the statutory limits, and the cooperative Volksbanks and Raiffeisenbanks have their own scheme to prevent insolvency and liquidation, the BVR-ISG.
Bank deposit protection for creditors of German credit institutions starts at the institutional level where the bank itself is protected from insolvency and liquidation. A second level of defense is provided by the statutory deposit insurance programs to eligible creditors for a maximized amount of 100.000 euro, raised to a n incidental coverage level of 500.000 euro. To avoid an asset write down via traditional corporate dissolution and novel bail-in procedures, voluntary schemes may compensate creditors for amounts exceeding the deposit insurance limits.
Recovery Strategies in Exceptional Circumstances
The safety-net of regulatory intervention and bank deposit insurance in Germany is comprehensive. Still, banks can fail and account holders and creditors may lose part of their investment. It is therefore important to comprehend the rules for repayment during statutory administration and deposit protection, as well as the protection of temporary high balances, the voluntary schemes and the resolution and bank liquidation procedures. The combined effect should provide maximum recovery, but strict compliance with the applicable rules is required.
Spedial administration and deposit insurance provide short term liquidity to account holders when a bank is placed under external management. The first step in bank resolution, administration, protects the critical functions and assets of the bank while a resolution plan is established. Limited access to deposits may be allowed. For deposit insurance, a payout event must be determined by the respective regulator. This is often confirmed when the bank is unable to repay deposits that are due and payable while this situation unlikely improves at short notice. Throughout these procedures, creditors can always take civil action against the bank under their contractual agreement. However, courts often postpone their administrative and civil rulings until the resolution is closed. Yet, creditors with account balances that exceed the statutory and voluntary schemes can hedge risk and investigate other routes for recovery.
Bank Deposit Protection in Germany
A German bank that fails or is likely to fail is for the time being unable to repay deposits to creditors for reasons relating to its financial position. The respective regulator then triggers a payout event and instructs the applicable deposit guarantee scheme to inform the creditors of the bank without delay that a payout event takes place. The DGS administration also informs the creditors about procedures and timeframes for compensation. Even though an official application for the statutory scheme is not necessary, creditors must follow the strict guidelines tailored towards the local market to receive compensation.
Collaboration between the bank and the deposit guarantee schemes safeguards swift examination and settlement of claims for compensation. It is therefore critical that the bank holds the correct account ownership information on file. The DGS administration has seven days to examine claims based on the available information. Claim approval results in repayment by bank check or to the account of the account holder at a different local bank. The DGS administration and the creditor have separated responsibilities. Creditors themselves are exclusively responsible to ensure that they are able to receive the compensation for a claim that is approved by the DGS administration.
Further information and claim evidence must be provided in matters of uncertainty, for amounts that are subject to a temporarily higher coverage level and for the repayment of liabilities resulting from securities transactions. Time constraints exist and depend on the type of coverage. These are between one and five years from the payout event is announced.
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