COMMISSION CONSULTATION ON REVIEW OF DIRECTIVE 94/19/EC ON DEPOSIT GUARANTEE SCHEMES

Transcription

1 European Commission Internal Market and Services DG Financial Institutions Interest Representative ID COMMISSION CONSULTATION ON REVIEW OF DIRECTIVE 94/19/EC ON DEPOSIT GUARANTEE SCHEMES The Federation of Finnish Financial Services ( FFFS ) welcomes the opportunity to respond to the European Commission s Consultation on review of Directive 94/19/EC on Deposit Guarantee Schemes (DGS) ( Directive ). In our opinion, increasing globalization and the emergence of cross-border banking groups has created the need to a more harmonised rules on deposit guarantee across Member States in order to treat equally and with the same degree of fairness depositors of a same institution wherever it is based. This would be consistent with the goal of a European single market and level the playing field for banks across the Member States. We believe that depositors are best protected through effective prudential supervision in the first instance and the DGS regime is subordinated in that respect. We are cautious with regard to an increase in the coverage level to euros and would prefer reverting back to the euros, considering that the benefits of a higher coverage are not obvious and may only be marginal as compared to the additional costs and to the competitive distortions involved. 1 Context Question 1: Do you agree in general that the current framework of DGS in the EU needs to be revised? Are the areas identified for review the right ones, or are there other priorities? We do agree that the current framework of DGS needs to be revised and that the areas the Commission has identified for review are the right ones.

2 2 Scope and level of coverage of DGS 2.1 Coverage level Question 2: Which of the coverage level options would you prefer? Would you prefer another option? The FFFS is cautious with regard to an increase in the coverage level to euros and would prefer reverting back to the euros, considering that the benefits of a higher coverage are not obvious and may only be marginal as compared to the additional costs involved. While the increase of the minimum level to euros may have been necessary to update the 1994 minimum level and to address issues of consumer confidence through strengthening consumer protection, the FFFS is uncertain of the benefits of any further increases. Moreover, the FFFS believes that the main issue lies more in the harmonisation of the coverage level across Member States than in a rise to a certain amount. While determining the coverage level, the Commission should take into account the international competitive positions for banking centres; moral hazard and distortions to asset allocation (i.e. protection of liquidity and financial stability vs. wealth); and the implications for DGS funding. Question 3: Should the coverage level you prefer be a minimum or a fixed level? Or do you think a different solution would be more suitable, e.g. a range with a minimum and maximum level? The FFFS deems that the coverage level should be a fixed level harmonised across Member States. A harmonised, fixed coverage level would have beneficial impact on financial stability, because one single level of protection takes away the reason for consumers to shift their deposits from one country to another offering a higher level of protection. Increasing globalization and the emergence of cross-border banking groups has also created the need to ensure a harmonised level of coverage across Member States in order to treat equally and with the same degree of fairness depositors of a same institution wherever it is based. A single coverage level would be consistent with the goal of a European single market. Harmonisation of coverage at a yet-to-be-determined amount would be helpful to ensure a level playing field across the single market and, at national level, would help to fend off any pressure for any further increases in the ceiling. A single coverage level would also play a major role in avoiding the need for cross-border branches to top-up with the scheme of their host country,

3 where the coverage level of the home and host schemes differ, which can create difficulties in payout procedures. In order to avoid the need for topping-up arrangements completely, also the scope of the deposit guarantee (e.g. excluded deposits and depositors as well as rules on set-off) should be harmonised. Question 4: Do you have background information or evidence whether depositors have split up their deposits when the financial crisis aggravated in autumn 2008? No, although the contacts from the depositors to our national DGS imply that many of them planned split up their deposits during the financial crisis so that they were covered by the deposit guarantee level. Question 5: Do you think the problem related to different brand names could be solved with a mere information obligation towards depositors? Or do you think banks should have the option to ask for coverage per brand name to avoid aggregation of accounts in case of failure? If so, and how, should this be taken into account when the contributions of such banks to DGS are calculated? The FFFS agrees that banks providing services under different brands in the single market can confuse customers. However, solving this will not be straight-forward. A solution should be found which would not affect the current flexibility to operate under different brands in the markets concerned nor interfere with current customer market structures, current group organisation and company law. At the same time, such solution should include providing understandable, clear, and neutral information to ensure depositors are aware of the coverage they can expect. Question 6: If the coverage level is fixed, should there be exemptions that allow a higher coverage of certain products for social considerations? Yes, there could be exemptions from the single level, notably for social considerations, to provide full coverage for certain kinds of deposits, such as proceeds from a sale of a residence. Such exemptions should be harmonised throughout the EU in line with the objective of offering the same level of protection to depositors. Question 7: Should temporary high account balances be covered? With reference to our answer to Question 6, we deem that also the rules on both higher coverage of certain products and temporary high account balances should be harmonised across Member States in order to secure a level playing field for both banks and the depositors. Instead of an unlimited cover for temporary high account balances, the most effective way forward might be a greater awareness of the protections available under the reformed DGS regime so that depositors can better

4 manage their risks. Question 8: Should mutual guarantee schemes and voluntary schemes be integrated into the Directive so that the same rules would apply for them as for 'classical' DGS? 2.2 Scope of deposits covered by the DGS We are not aware that mutual guarantee schemes had caused competitive distortions or influenced depositor behaviour in Finland. There are no voluntary schemes in our jurisdiction. In general, we deem that the rules on all exemptions should be harmonised across Member States in order to secure a depositor confidence by providing clear and simple rules. Question 9: Which solution(s) would you prefer as regards structured deposits? We deem that structured deposits fulfil the deposit criteria and should be considered as eligible deposits. Question 10: Which solution(s) would you prefer as regards debt certificates? We deem that debt certificate is clearly an investment product and should not be treated as a deposit guaranteed by a DGS. Question 11: Which solution would you prefer as regards accounts in non-eu currencies? In our view, accounts in non-eu currencies should be included in the scope of deposit guarantee. Whatever solution the Commission ends up proposing, we deem that the rules on all exemptions should be harmonised across Member States in order to secure a depositor confidence by providing clear and simple rules. Question 12: Should the eligibility criteria as regards depositors be fully harmonised or should Member States retain some discretion to decide about eligibility of depositors? We deem that the depositor eligibility criteria should be harmonised across Member States in order to secure depositors confidence by providing clear and simple rules. Question 13: Do you have background information or evidence whether a covered amount of is relevant for enterprises in the financial sector? No.

5 Question 14: Do you have background information or evidence whether a covered amount of is relevant for authorities? No. Question 15: Do you have background information or evidence on how many depositors having a relationship with the failed bank are actually concerned by this? No. Question 16: Do you have background information or evidence on how many depositors that have opened their account anonymously are actually concerned by this? In Finland, it is not possible to open an account anonymously. Question 17: Do you have background information or evidence whether a covered amount of is relevant for companies or enterprises above a certain size? No. Would you prefer to keep the current approach (companies that cannot draw up abridged balance sheets may be excluded by Member States)? We deem that either all companies should be included as eligible depositors, or excluded completely. Classification of companies would increase the administrative burden for either banks or for the DGS. Classification by the DGS would inevitably prolong the payout period. 3 Structure and mandate of DGS throughout the EU 3.1 Fragmentation of DGS Question 18: Would you be generally in favour of a pan-eu DGS? Before considering the creation of a single European DGS, the supervisory structure at EU level had first to be harmonised. In a second stage, the question was whether to establish a single DGS for all types of banks or for cross-border banks only. In the latter case, then a further question was how to ensure the financing of the remaining respective national DGS. However, it is clear that improved co-operation among the European DGS is needed to enhance the creation and operation of a European system of DGS. We believe that the Commission should first seek more harmonisation of the national DGS while keeping investigating the issue of a pan-eu DGS, including its structure and mandate within the future new prudential framework.

6 Questions relate to the structure and scope of a pan-eu DGS and are thus skipped. 3.2 Limited powers of DGS Question 21: Should the DGS retain the current mandate of compensating the depositors or should they have a wider mandate (e.g. providing liquidity, participate in the reorganisation or play an active role in the winding up of banks)? Current mandate suits the Finnish regime and we deem that the DGS should focus on compensating the depositors. Whatever role for the DGS the Commission ends up proposing, we deem that the rules on the role should be harmonised across Member States in order to secure a level playing field for the banks operating on the Single Market. 4 Functioning of DGS 4.1 Insufficient depositor information Question 22: Would you prefer a template for standardised information to depositors in order to ensure that all depositors throughout the EU get the same information? If so, should the template be annexed to the Directive or developed by stakeholders? It might be an impossible task to ensure that all depositors throughout the EU get the same information, as long as the rules on deposit guarantee vary from one Member State to another. Question 23: Should it be required or recommended that the depositors were informed that it is safer to split up deposits if the coverage level is exceeded? Definitely not. While we agree that depositor awareness should be promoted, certain cautiousness should still be followed in informing the depositors. Information on deposit guarantee should be kept on a general level in order not to evoke unnecessary anxiety and distrust to the financial markets. Informing the depositors to split up deposits would also contradict the informing bank s business sense. Question 24: When and how should depositors be informed on deposit guarantee? We deem that informing the depositors at the time they make the deposit by having a reference to deposit guarantee in the terms of the deposit is sufficient.

7 While creating the rules on informing the depositor, a clear balance should be kept between raising the depositor awareness and exploiting the deposit guarantee in marketing in an inappropriate manner. High deposit guarantee levels may cause moral hazard to unhealthy businesses and tempt them to base their business model more or less on deposit guarantee. Question 25: Which solution would you prefer for information given to depositors in case of a bank failure? Which approach would you prefer in case of a pan-eu scheme not being a single entity? 4.2 Set-off arrangements We find the current approach appropriate, where the obligation to inform the depositors lies with the home country scheme, but the home and host country DGS can make individual agreements about who informs depositors. Question 26: Which solution would you prefer regarding set-off? 4.3 Procedures for payout In general, if changes are made to set-off arrangements, simple and practicable solutions should be found. Further clarification on the application of set-off rules within the Directive should be provided by the Commission. Differences in set-off regimes may cause problems regarding topping up. For example, if the home state scheme applies set-off and the host state scheme does not, the bank establishing a branch in the host state may apply for supplementary cover even if the cover limit was higher in the home state. Furthermore, the Commission should carefully consider the link between set-off arrangements and the payout period. It should be highlighted that at the heart of a shorter payout timeframe lays good quality data availability, rather than the possibility to set off or not. Absolute clarity on what is and what is not covered is also critical for shorter payout period and clarity on set-off. Question 27: Which solution would you prefer regarding payout delays? When talking about the payout timeframe, it is necessary to separate the time when an authority declares a credit institution s default from the time when data can be made available to the DGS. It would be impossible in practice to both gather all the data at the same time as the authority s declaration of an institution s failure. It would a fortiori be impossible to gather all the necessary data, process them and make the payouts within a substantially shortened timeframe.

8 Consumer expectation of a fast payout is an essential feature of a credible DGS. The FFFS believes that greater thought needs to be given to the natural parameters of what can be achieved in terms of ensuring efficient and orderly compensation payout through DGS and, where necessary, the arrangement of replacement banking facilities. From the perspective of depositors confidence moreover, the bottom line is to provide depositors with clear and simple information that they would get their money within a specific timeframe. It needs to be explored which measures the industry can agree to on the basis that they are deliverable in practice and which help depositors appreciate that their money, up to an applicable limit, is truly safe. There are a number of operational barriers which complicate payout to be considered: Access to supervisory information in a timely way; Customer information management; Adequate IT systems; Scale; Anti money laundering obligations; Credit assessment; Direct debits; Access to cash machines; Mortgages; General availability of capacity to undertake payouts without the system grinding to a halt; Adequate human resources; and Legal procedure A further reduction in the pay-out timeframe could not be practically achievable without changing other aspects such as counterclaims or setoffs, retention rights, data quality and streamlining the exemptions listed in the annex of the Directive. Question 28: Would you prefer alternative solutions as means for payout? If so, on a voluntary or mandatory basis? Alternative solutions The FFFS believes that depositors are best protected through effective prudential supervision in the first instance and thereafter by continuity of banking services and access to deposits for systemic institutions in preference to a reliance on payout through a DGS.

9 The Directive has introduced the concept of continuity of banking services and access to bank liquidity as a viable tool for depositor protection in the context of emergency payouts. Continuity of banking services delivers a superior outcome as depositors experience no or little disruption in their access to deposits. It is important to note that continuity of banking services can play an important role in both before and after insolvency. Special resolution regime tools before insolvency provide the means for regulatory authorities to avoid a bank moving into default and triggering payout via the DGS. Continuity of banking services can therefore be maintained by the authorities whilst a solution is found to address the problems at the distressed bank. Where a bank has moved to insolvency, it would be more effective to use the existing infrastructure of the failed bank to facilitate faster payout. This would require an insolvent bank being permitted to use the payment systems from which it would typically be suspended, to facilitate payments or access to eligible depositors. By granting eligible depositors constrained access to their accounts, whereby depositors are able to draw down money up to the compensation limit (or other specified amount), remaining liquidity of the failing bank will be used up for the pay out first. Even a failing bank may still possess a substantial amount of liquidity. Using such liquidity for pay out is very cost efficient and also an advantage for the DGS as its assets will only be drawn if the liquidity of the failing bank will not be sufficient to pay out all eligible depositors up to full compensation limit. Such measure will, therefore, strengthen the stability of the deposit guarantee system. The insolvent bank would be reconnected to some parts of the payments system solely for the purpose of access to deposits and other transactional services would have to be secured by customers opening a new bank account with another provider. This option is however only relevant for the failure of smaller non-systemic banks. Member States should be able to retain flexibility in establishing alternative means for reimbursing depositors, irrespective of the approach which will be adopted by the Commission. Interim or emergency payouts The issue of whether to provide emergency payments is a very important one. However, it is also an issue that requires close analysis as there would be several ways of implementing it. For instance, it would need to be considered whether the early payment would be made through the DGS or through the bank. If such and option is regulated in the banking law, it can only be made through the bank. Furthermore, it can be argued that if the possibility to make early payments is granted to the DGS, it would mean

10 that the DGS would have to do the work of data verification and compensation process twice (once for the early payout and once for the rest of the process). The FFFS wishes that the Commission would assess the model for providing immediate payout to depositors by means of the available liquidities of the failing bank and get inspiration from to design the EU system while respecting the respective national legal frameworks. Question 29: Which solution(s) would you prefer regarding payout modalities? Whatever the Commission ends up proposing, we deem that the rules on payout modalities should be harmonised across Member States. a) Determining the payout timeframe in calendar days would certainly enhance consumers understanding compared to providing information to depositors as to when they would be compensated in working days. b) Paying the depositors in the same currency as the deposits were made in would be the most clear and simple solution in our opinion. c) We think that paying interest accrued, if such interest was agreed upon in the deposit terms, up to the failure of the bank is a fair solution for the depositors. Question 30: Which solution would you prefer regarding verification of the claims? We would prefer harmonising the eligibility criteria (g) and abandoning setoff (i) or harmonising the rules on set-off as solutions to quick and precise verification of claims. Question 31: Would you prefer one of these solutions regarding application of reimbursement? If so, on a voluntary or mandatory basis? Recent European experience has shown that most appropriate means for the application of reimbursement depends on the failed bank, its IT solutions that might be readily available for DGS purposes and the number of depositors at a failed bank. Therefore, a wide discretion on application procedure should be allowed in the Directive. Question 32: Which solution would you prefer regarding involving DGS at an early stage? DGS would need to be able to enter banks ahead of starting the payout to get the data necessary to start the procedure and be in a position to meet a shorter payout timeframe.

11 Question 33: Which solution would you prefer regarding information exchange between banks and schemes? The FFFS supports allowing the DGS access to relevant banks records when DGS is informed by competent authorities that triggering of DGS becomes likely. Early access would be prone to shorten the payout period. Question 34: Which solution would you prefer regarding proven capability of DGS to handle payout situations effectively? 4.4 Cross-border cooperation DGS were not created to compensate for the failures of medium and large banks. Moreover, the DGS Directive has been created to provide a framework in which the DGS are able to payout effectively. Major changes in financial markets may also weaken the proven capability to handle the payout situations dramatically in a very short time, as was seen in the Icelandic banking crisis in The FFFS therefore does not see the relevance of Question 34. DGS must have contingency planning in place but disclosing the amount of funds could undermine public confidence by sending a message that could be misinterpreted. Question 35: Do you consider topping up a problem? If so, which solution would you prefer? The possibility for branches to offer higher level of coverage is a serious concern as it is not market driven competition but regulatory competition. Topping up is a problem for the schemes. Such arrangements often require detailed agreements and lengthy negotiations between the home and host country schemes. It may also be very difficult to determine, whether the home state bank is entitled to supplementary cover or not (e.g. in situations where different set-off rules apply (See also answer to Question 26)). Topping up arrangements are prone to prolong the payout period. If the coverage level and the scope of the deposit guarantee is harmonised across the Member States, topping-up arrangements would not be necessary anymore. Question 36: Which solution would you prefer regarding cross-border cooperation between DGS? The DGS in a host country should, in our opinion, act as a single point of contact for depositors at a branch in the host country, encompassing post box services and advice in the host country s language. Acting as

12 a payment agent is more problematic, because in order to act as a payment agent, the host state scheme would require collateral for reimbursement, which, in turn, the home state scheme cannot likely give. 5 Financing of DGS Question 37: Which solution would you prefer regarding level of funding of DGS? The starting point should be that all legal entities operating within the EU should bear a similar cost in terms of contributions to the DGS, whether on an ex-ante or ex-post basis. The banks in different European countries should have similar costs from DGS in order to achieve level playing field across Europe. Moreover, a fixed target level for the fund and maximum level for the contributions of individual banks would be important. The DGS system should also manage enter and exit of banks to the systems in a cost neutral way. Question 38: Would you prefer introducing risk-based contributions? Which models would you envisage? An argument in favour of the idea of risk-based contributions is that the costs of a failure are distributed in a fairer way. This can nevertheless only be the case where the differences in contributions as a consequence of a riskier profile are substantial. If the difference between the most and least risky player is very small, then the behavioural effect is negligible and the existing prudential regulations provide a more effective means of achieving adjustment of the risk appetite. In addition, in theory, there should be no difference between the supervisory risk judgment and that of a DGS. Ideally also no extra burdens should follow from reporting to the supervisor and to the DGS. It is important to find a workable and efficient method for risk based contributions. The incentives given by risk-differentiation are of great importance from a financial stability and level playing field perspective. The system to calculate the risked-based contributions must be transparent to banks and based on simple and fixed rules. Member States should be able to decide how such a system would be implemented as national differences may need to be considered. This makes it also easier to adjust such a system within a short timeframe where necessary.

13 Question 39: Which solution would you prefer regarding funding mechanisms? If you prefer interim financing, please describe how and by whom such financing should be provided? Applying the same funding rules would remove potential competition distortions related to the fact that banks in ex-post systems may have more funds available to invest in markets as they do not have to contribute to theirs fund. In addition, it may increase confidence among depositors. 6 Any other issues Question 40: Are there any other issues that have not been mentioned above but should be dealt with in the context of the review of the DGS Directive? If so, please describe the problem and its different impacts as precisely as possible. No. We deem that the Commission has addressed the issue adequately. FEDERATION OF FINNISH FINANCIAL SERVICES Erkki Kontkanen Director