Is the deposit guarantee a state guarantee?
- Thread starter RedOnion
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This is an important observation. The DGS exists within a much wider recovery & resolution framework.
For any large institutions, the DGS is itself an absolute last resort, and it's almost theoretical that it could ever be used. For the DGS to get called upon for a systemically important bank, the entire economy would be in trouble.
But lots of the high rate paying accounts being discussed on AAM are tiny banks which are very much relying on the DGS. They wouldn't be able to access retail funding without it, and nobody would blink if there was a payout. In Latvia, BluOr bank for example is less than twice the size of St Canices credit union here (by assets)!
No deposit holder got burnt in 2008. Germany was against any sort of bailout for sovereign debt in 2008. That didn't last. Germany was against Eurobonds but when pandemic hit, they changed their tune on them to fund the pandemic rescue fund. Scholz is already on the record as saying he supports a European Guarantee scheme but it is a political non starter domestically. Until the next crisis hits......
Which might not be too far away if even the Bundesbank is struggling!!
Bundesbank denies it may need recapitalisation on bond-buying losses
Germany's Bundesbank denied on Monday a report that it might need a bailout to cover losses arising from the European Central Bank's bond-buying scheme.
www.reuters.com
But the major Irish banks are supervised not by the Central Bank of Ireland but by the European Central Bank. https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.listofsupervisedentities202308.en.pdf.
If an entity is supervised by the ECB and it runs into trouble, what happens is determined by the Single Resolution Board. https://www.srb.europa.eu/en/content/what-bank-resolution.
On deposits the SRB says "
- covered deposits are fully protected. According to the Deposit Guarantee Scheme Directive, € 100.000 is an appropriate level of protection and should be maintained. Deposits are covered per depositor per bank. This means that the limit of € 100.000 applies to all aggregated accounts at the same bank. Depositors must be informed that deposits held under different brand names of the same bank are not covered separately. However, deposits by the same depositor in different banks all benefit from separate protection." https://www.srb.europa.eu/en/content/resolution-qa.
Supervision doesn't matter. Deposit Guarantee Schemes are domestic schemes and are nationally legislated for based on EU legislation. The Irish banks don't pay their contributions to the ECB. They pay them to the Central Bank and the Central Bank controls it. Whether the bank is supervised by the National Central Bank or the SRB is irrelevant as to if a deposit is covered or not.
The single resolution fund and access to it is different and that is where the the Single Resolution Board comes in.
coolaboola12
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Would people consider the risk of getting burned as a depositor if using bunq is less than some of the other small banks ? for example? As they are Dutch and the Netherlands is a pillar of the EU
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This is just another way of implying the DGS is a state guarantee. It's not. The SRB will tell the Central Bank, as the national resolution authority what to do if a significant Irish bank runs into trouble, e.g. fails or is likely to fail. And as the SRB says resolution should occur without relying of taxpayers funds.
Another important point is if a guarantee on bank deposits, i.e. a debt of the banking system, were a state guarantee, Eurostat is the competent authority to decide if the net debt should be classified as a debt of the Government, so Ireland's debt position would look worse than it might be, and Ireland's credit rating could suffer. Such a classification of debt by Eurostat was a cause for concern during the EU/IMF programme for Ireland in 2011.
askabouttax
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So, if the Central Bank funds the deposit guarantee due to a shortfall, and the State pays back the Central Bank immediately afterwards, what does that constitute? If we take the Central Bank short term funding out of the equation, what does one call the State funding of the DGS (albeit hoping to recoup) - I asked this earlier but not sure it was answered. It is a guarantee by the State to make good any money paid by the Central Bank to fund the DGS - surely in a roundabout way then, this is the State guaranteeing the shortfall in the fund, and therefore guaranteeing the deposits?
I never said it was a a State Guarantee. Nobody is saying it is a State Guarantee. Doesn't mean that the State still wouldn't intervene.
The SRB has nothing to with the Deposit Guarantee Scheme. The SRB has to do with bank failure resolutions. They could decide to put in equity from the SRF which means that there is no need to protect deposits. They could decide to let it fail. In which in case the DGS kicks in. The SRB doesn't decide when the DGS kicks in. It is nationally legislated.
What you are basically saying is that there is a difference between a deposit in a bank supervised by the SRB and one supervised by the NRB. There isn't. If a bank fails under the SRB, the SRB can't invalidate the DGS and deposit holders can't access the scheme. They simply can't and to suggest otherwise is wrong. It's National law.
What happens the DGS fund if there aren't enough funds is a different question. If AIB fail of course there won't be enough to cover all the deposits. Does anyone really believe that AIB depositors would be allowed to lose money? They won't. That hasn't changed from the financial crisis. The DGS is just another layer of protection where banks are supposed to pay for their own insurance. It doesn't make the use of CB/Taxpayer money if there is a shortfall illegal.
There is no contractual obligation on anyone including the Government or Central Bank to provide funds to the DGS. That's why it is not a guarantee. They weren't stupid when they designed it. They knew what they were doing. Up to people to believe they would burn deposit holders or not.....But the DGS in itself is just an added layer of protection between bank failures and taxpayers money.....
coolaboola12
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In the Dutch guarantee scheme website they state "Your money in Dutch bank accounts is legally protected by the Dutch Deposit Guarantee. Should a bank go bankrupt, De Nederlandsche Bank (DNB) will make sure you get your money back, from 1 cent up to €100,000 per person, per bank. Guaranteed."
This is saying that depositors wont lose even though the DSG isnt big enough ? Thats what it sounds like
This is saying that depositors wont lose even though the DSG isnt big enough ? Thats what it sounds like
Actually, you are right. Had to read it through again as it has changed. Member States are obligated to ensure the DGS has money and one DGS can also lend money to each other. So there is a backstop there. Presume as last resort after the DGS had borrowed off other DGS schemes if they could. But at the end of the day, the Government would have to step in.
Below is from the European Banking Authority
DGS funding ultimately comes from those banks that are protected by that DGS, different funding models for DGSs have traditionally existed in the EU. The most recent Deposit Guarantee Schemes Directive (DGSD) harmonises DGS funding, so that now DGS funding works as follows:
(i) All DGSs should have a fund that is created in advance of a bank failure. Banks covered by those DGSs are required to pay levies into the fund over time.
(ii) Where a DGS does not have enough money at the time it has to protect deposits, it can raise extraordinary levies from all of its members to cover the shortfall.
(iii) Member States are obliged to ensure that DGSs have adequate alternative funding means in place to ensure that they can meet their liabilities to repay or protect depositors. In practice, this may, for instance, entail that the Member State provides a temporary State-funded backstop for its DGS.
(iv) DGSs are also allowed to borrow between each other or from other market participants or credit institutions. Therefore, if one DGS does not have enough money available immediately, it can borrow money from another DGS, market participant or credit institution, provided they are willing to extend such a loan.
Deposit Guarantee Schemes data | European Banking Authority
coolaboola12
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Thanks, makes me feel a bit better about itActually, you are right. Had to read it through again as it has changed. Member States are obligated to ensure the DGS has money and one DGS can also lend money to each other. So there is a backstop there. Presume as last resort after the DGS had borrowed off other DGS schemes if they could. But at the end of the day, the Government would have to step in.
Below is from the European Banking Authority
DGS funding ultimately comes from those banks that are protected by that DGS, different funding models for DGSs have traditionally existed in the EU. The most recent Deposit Guarantee Schemes Directive (DGSD) harmonises DGS funding, so that now DGS funding works as follows:
(i) All DGSs should have a fund that is created in advance of a bank failure. Banks covered by those DGSs are required to pay levies into the fund over time.
(ii) Where a DGS does not have enough money at the time it has to protect deposits, it can raise extraordinary levies from all of its members to cover the shortfall.
(iii) Member States are obliged to ensure that DGSs have adequate alternative funding means in place to ensure that they can meet their liabilities to repay or protect depositors. In practice, this may, for instance, entail that the Member State provides a temporary State-funded backstop for its DGS.
(iv) DGSs are also allowed to borrow between each other or from other market participants or credit institutions. Therefore, if one DGS does not have enough money available immediately, it can borrow money from another DGS, market participant or credit institution, provided they are willing to extend such a loan.
Deposit Guarantee Schemes data | European Banking Authority
www.eba.europa.eu
No, they're not.
The Directive simply provides that:
"Member States shall ensure that DGSs have in place adequate alternative funding arrangements to enable them to obtain short-term funding to meet claims against those DGSs."
As implemented in Ireland, the Central Bank may (not shall), provide financing to the Fund on a short-term and urgent basis in certain circumstances,
So, no, there is no obligation on the State to ensure that the DGS has sufficient funds at all times to meet its obligations.
Here is the relevant Irish regulation -
| Alternative funding means | ||
| 22. (1) The designated authority may, on behalf of the Fund, contract borrowings or other forms of support from credit institutions, financial institutions or other third parties where— | ||
| (a) the amounts raised in accordance with Regulation 20 are not sufficient to cover the losses, costs or other expenses incurred by the Fund, and | ||
| (b) the extraordinary ex-post contributions provided for in Regulation 21 are not immediately accessible or sufficient. | ||
| (2) The Bank may, subject to the existance of the circumstances set out in section 8 of the Financial Services (Deposit Guarantee Scheme) Act 2009 (No. 13 of 2009), when the Bank considers it appropriate and to such extent it thinks proper from time to time necessary for safeguarding systemic stability having had regard to the need to— | ||
| (a) protect the interest of persons or any class of persons maintaining deposits with one or more credit institutions authorised or formerly authorised by the Bank, or | ||
| (b) promote the orderly and proper regulation of banking, | ||
| provide finance to the Fund on a short-term and urgent basis in order to meet the financing requirements of the Fund under these Regulations. |
If AIB fail, the DGS will be out of money. They raise contributions from other banks. Still not enough. They try to borrow from foreign schemes or other institutions. Fail to do so because of concerns that BOI will fail next.
What do you think happens? They go to the next source of funding. The Central Bank. The legislation says Member States shall ensure that DGSs have in place adequate alternative funding arrangements in place. If the Central Bank/Government do not provide the final backstop, they have not ensured adequate alternative funding arrangements are in place as per the legislation
The Central Bank are then entitled to get their money back from the Central Fund within three months
If the Bank charges on the deposit protection account any payment out of the Bank’s own funds in accordance with the Deposit Guarantee Regulations, the amount of the payment shall, with the approval of the Minister, be repaid to the Bank out of the Central Fund or the growing produce of that Fund within 3 months.
What do you think happens? They go to the next source of funding. The Central Bank. The legislation says Member States shall ensure that DGSs have in place adequate alternative funding arrangements in place. If the Central Bank/Government do not provide the final backstop, they have not ensured adequate alternative funding arrangements are in place as per the legislation
The Central Bank are then entitled to get their money back from the Central Fund within three months
If the Bank charges on the deposit protection account any payment out of the Bank’s own funds in accordance with the Deposit Guarantee Regulations, the amount of the payment shall, with the approval of the Minister, be repaid to the Bank out of the Central Fund or the growing produce of that Fund within 3 months.
It does indeed.
And I have cut and pasted the "alternative funding arrangements" in Ireland in the post above.
What the Directive does not do is impose an obligation on a Member States to ensure that the relevant DGS has sufficient funds at all times to meet its obligations.
There really is no State guarantee of Irish bank deposits.
You may well have a reasonable expectation that the State will act as the final backstop (assuming it is in a position to do so) but an expectation is not a guarantee.
coolaboola12
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Then what is the point of the DSG in the case of a big bank like AIB?
By the way the Dutch one specifically says money under 100k is guaranteed - poor choice of words ?
Who is claiming that the DGS would have the funds to cover it's obligations at all times? No scheme in any Country has that. There is no requirement for that. The issue is what funds are in place once the fund is called or likely to be called on. That's when the obligation on the Member States to ensure the fund is adequately funded or has access to adequate funding to ensure that deposits up to 100k are covered. As the EBA says, in practice, this comes down to a State backstop as last option.
The question about what happens if the State can't provide the funding is valid. Then you are back to usual back and forth with the rest of Europe on bail in's/bail outs...... But it will really is a case of CAN'T rather than WON'T provide it....
All this discussion only proves once again that banking was, is and always will be an activity based on trust - I believe my money is safe, so I leave it in the bank (whatever that means)
Fortunately, states and governments in almost all democratic countries have stepped to keep this trust in place whenever a run on the banking system happened but this is no guarantee that they will or could in the future
Fortunately, states and governments in almost all democratic countries have stepped to keep this trust in place whenever a run on the banking system happened but this is no guarantee that they will or could in the future
askabouttax
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However, if (when) the Central Bank pays to cover the shortfall for a big bank like AIB, the State SHALL pay the funds back to the Central Bank. In effect, all the Central Bank is doing is paying up a few days earlier as it has a regulatory obligation to decide on it. This does not change the fact that the State is providing a guarantee to pay back the Central Bank. Take this little intervening period out of things, and the State has indeed backstopped the deposit guarantee fund. It has no choice.
As quoted by Sunny, the EBA stated, "In practice, this may, for instance, entail that the Member State provides a temporary State-funded backstop for its DGS."
Most people will read that as a quasi State guarantee.
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