RAHANDUSMINISTEERIUM MINISTRY OF FINANCE OF ESTONIA European Commission markt-dgs-consultation@ec.europa.eu 27. July 2009 Estonian response to consultation document concerning deposit guarantee schemes Please find hereby the contribution of Estonian different counter-parties concerning deposit guarantee schemes (hereafter DGS). Our response is summarized position of the central bank (Bank of Estonia), deposit guarantee scheme (Guarantee Fund), Ministry of Finance and Estonian Banking Association. First we would like to emphasize that it is important to modernize the deposit guarantee conception in European Community by strengthening the member states guarantee schemes and improve the whole framework. We strongly support the single European banking market and its further integration. Thus it is necessary to harmonise the differing legislations and rules of DGS to ensure a level playing field throughout the EU. Estonia strongly believes that harmonization the bases of the DGS s could fulfil their function of raising financial market confidence especially in the eyes of retail clients. DGS Directive should take maximum harmonisation underway and leave as little room as possible for national exemptions. The basis of financing the schemes, coverage level, scope or delay of the payout should apply equally to all the member states In addition, the simpler DGS is, more understandable and trustworthy it is for depositors, thus contributing to financial stability. As the crisis has shown, if there are national differences in DGS (coverage level or scope or both) depositors are very quick to move their deposits to banks backed with the highest coverage and thus may contribute to financial instability as the infrastructure in the Single Market has developed well. For these reasons it is crucial to take the integration of the Single Market further and harmonise DGS throughout the EU to the furthest extent. In that sense we welcome the intentions to find appropriate solutions for a safety net of depositors if banks fail. 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? Estonia agrees that the DGS directive has to be revised in order to enhance depositor s confidence towards European banking and ensure a level playing field throughout the EU. In general identified areas are correct ones. Appropriateness of the coverage levels. The following options could be considered: (a) Revert to a coverage of 50 000 (b) Coverage of 100 000 (current approach from end 2010 onwards) (c) Coverage of a higher amount (d) Coverage depending on the actual size of deposits or economic indicators such as the Gross Domestic Product per capita (thus different in each Member State) (e) Unlimited coverage Question 2: Which of the above options would you prefer? Would you prefer another option? Please explain your choice.
2 Estonia believes that the coverage level, whichever it will be, should be prefixed in order to assure the equal treatment of the depositors and financial institutions in the EU single market and eliminate the opportunity of putting some country into preferable position. At the same time we think that there should be left some responsibility for the depositors and therefore we are not supporting unlimited coverage. We support one fixed level throughout the EU, either it is option (a) or (b) is not that relevant to us, because average size of a deposit is much smaller in Estonia. Member States that have higher coverage level should then also revert to the level fixed by the Directive. We object option (d) as it will harm fair competition and will cause extensive outflow of deposits to the Member States with higher coverage level (or within the country to branches of foreign banks which resident countries provides higher coverage). Also thinking about the future developments in area of deposit guarantee the option (d) could also be analysed as an option. Question 3: Should the coverage level you prefer (Question 2) 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? If so, please describe. Please give reasons for your choice. Please see the comments to question 2. In order to promote the free movement of services and the development of cross-border banking and to secure the fair competition and level playing field in European community the fixed coverage level is definitely preferable. As the current crisis has shown, if there are differences in coverage levels, depositors move their deposits where the coverage is the highest, thus possibly threatening financial stability. Question 4: Do you have background information or evidence whether depositors have split up their deposits when the financial crisis aggravated in autumn 2008? Should depositors be actively encouraged to split up their deposits between different banks or is this inappropriate? Please give reasons. We did not witness splitting of deposits, but definitely witnessed large movement of deposits from local credit institutions to foreign banks branches which had the higher coverage level. From the financial stability perspective this is a much more relevant issue than splitting of deposits and thus the basis of DGS (coverage level, scope etc.) should definitely be harmonised throughout the EU to avoid situations like these. In addition, as the average Estonian deposit is much lower than the coverage level most of the depositors have no need to split up their deposits. The banks should definitely inform the level of deposits which are covered and give also review of possibilities to ground the risk in case of the bank fails by splitting the deposits. At the end of 2008 the Estonian media also invited to split the deposits in some cases. Also some depositors have made reference to this possibility in their requests to the Deposit Guarantee Fund. In overall we think that depositors should not be actively encouraged to split up their deposits between different banks at least by the DGS or other financial supervision authority because the investment decisions should be taken by the depositor themselves and the reason of making deposits is not coming from the fact that deposits are insured. The possibility shall be explained to the depositors as diffusion of risks is good investment advice. For this reason we are also in favour of higher coverage level (EUR 100 000). Investment decisions themselves however are at the same time also questions of consumer education that will definitely be the separate or let s say parallel topics that should be covered and further developed in the short run perspective at the EU level. Question 5: Do you think this problem could be solved with a mere information obligation towards depositors (see Questions 22-25)? Or do you think banks should have the option to
3 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? Current practice (one coverage per depositor per institution) is simple, clear and a well-working arrangement and should be continued. We do not support coverage per brand name as it may cause confusion (for depositors) and disputes (for regulators). The Deposit Guarantee Fund of Estonia has no evidence that such cases have taken place among our guarantee fund participants (members) or in the branches of other foreign credit institution operating in Estonia. But as it seems appropriate in some markets we think that the participation in DGS s could also be based on brands in such cases. Estonian bankers association expressed their view that private sector do not support the idea, because it will cause major confusion and disputes products in different banks are different (always are some minor discrepancies and somebody has to take each time decision, which products of that particular bank should be covered and which not. Current practice (coverage level per customer) is simple and well-working arrangement. Banks may also deliberately set up different brands to get a higher coverage per depositor than competitors thus creating competitive distortions. To avoid confusion for depositors when banks market their deposit products under brand names other than banks names, there should be an obligation to inform depositors. Question 6: If the coverage level is fixed, should there be exemptions that allow a higher coverage of certain products for social considerations? If so, for which products should there be exemptions and up to which amount? Should this be harmonised or should Member States have the discretion to decide on this? In the latter case, which elements should be within the discretion of Member States (e.g. amount and duration of coverage)? Either way this should be harmonised and certainly not left to the discretion of Member States. Which products and to what extent is a secondary issue for us as long as it is equal throughout the EU. Almost every Member State banking market has slightly different products which are considered as deposits that should be covered. We believe that irrespective of the product nature and conditions provided in the market the coverage should be the same and we should not generate market arbitrage possibilities by the regulators. Although it should be mentioned that the list of different deposit product should be stated through the directive in order cover the same kind of deposits all over the Europe. To grant bases of fair competition and level playing field to each and every bank, we do not support Member States level exemptions on principal and material issues. The harmonization of the definition of deposits and which kinds of deposits are covered by the deposit guarantee schemes would definitely be useful in present situation. Question 7: Should temporary high account balances be covered? If so, up to which amount and for how much time? In which situations should these balances be covered? Should this be harmonised or should Member States have the discretion to decide on this? In the latter case, which elements should be within the discretion of Member States (e.g. situation, amount and duration of coverage). Should, in order to facilitate payout, such balances be transferred to special accounts that are tagged? Do you see other solutions to protect temporary high balances? First and foremost this exemption should be harmonised at the EU level. It could be that certain products with temporary high account balances should be covered for social considerations and Suur-Ameerika 1 15006 TALLINN Telefon 611 3558 Faks 696 6810 http://www.fin.ee Registrikood 70000272 E-post info@fin.ee
4 treated as other deposit accounts that are without exemptions and applying the same coverage level if they are considered as deposits by the definition of the Directive. For example in Estonia we can also bring similar situations where third persons money is temporarily hold on some other persons account like notaries account. In such cases it will be very difficult to distinguish and establish which balances shall be covered and which not. But if some situations (like selling the residential home, disburse of mortgage credit etc) are selected as an exemption, then it should be harmonised on European level. Estonian private sector assured that a special account is possible solution to protect temporary high balances if needed. 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? If so, how? Should there be restrictions on advertising for these schemes? Please provide reasons. Directive should regulate only mandatory guarantee schemes and leave the voluntary schemes designed by the market itself. Therefore mutual guarantee schemes and voluntary schemes should not be integrated into the Directive until they are not a threat to the stability of the banking system and protection for depositors is in place. It seems that in current financial situation (every bank is struggling with its high loan losses) the increase of banks contributions to the fund is not welcomed and reasonable. Any mutual or voluntary scheme, integrated into the Directive, will increase existing obligations for DGS participants. Advertisement restrictions shall be the same (fair competition). Question 9: Which solution(s) would you prefer as regards structured deposits? Please provide reasons. Would you prefer Question 10: Which solution(s) would you prefer as regards debt certificates? Please provide reasons. Would you prefer Question 11: Which solution would you prefer as regards accounts in non-eu currencies? Please provide reasons. Would you prefer The scope of eligible deposits, depositors and the coverage level are the main elements of the DGS and it would be preferable if they all are clearly defined and harmonised as far as possible. If the scope of eligible deposits is clearly defined and harmonised, then all the deposits which are eligible should be fully covered according to the coverage level. In this case the DGS would be understandable to the depositors generally and in the case of deposit transaction of cross-border banking. We think that we should not definitely discriminate any currencies that mean the coverage should not depend on which currencies the deposits are. Question 12: Should the eligibility criteria as regards depositors (provided for in Annex 1 no. 1-11 of the Directive) be fully harmonised or should Member States retain some discretion to decide about eligibility of depositors? (If you prefer that Member States retain discretion, please skip questions 13-16) In principle we think that the eligibility criteria s regarding depositors (provided in Annex 1 no. 1-11 of the Directive) should be fully harmonised which mean that Member States do not retain discretion to decide about eligibility of depositors. At the same time all the eligibility criteria s for depositors in the Annex 1 of the Directive should be analysed and adjusted taking into account that these criteria s should be understandable to the depositors before opening an account (deposit). For example: depositors that obtained special conditions aggravating the financial situation of the bank is a criterion which is likely unconvincing and immeasurable. Estonian private sector thinks that Member States shall also retain some discretion due to
5 economical differences and that the current Directive (setup) is quite reasonable in that sense. Enterprises in the financial sector Question 13: Do you have background information or evidence whether a covered amount of 100 000 is relevant for these enterprises? Which solution would you prefer? Please provide reasons. Would you prefer another option? Please describe. Authorities on central and local level Question 14: Do you have background information or evidence whether a covered amount of 100 000 is relevant for authorities? Which solution would you prefer? Please provide reasons. Would you prefer Do you have background information or evidence on how many depositors are actually concerned by this? Question 15: Which solution would you prefer? Please provide reasons. Would you prefer We are not precisely sure how many enterprises are influenced by the covered amount of 100 000 euros, but as average deposit amount is relatively small in Estonia, then we estimate that the raising the coverage level will increase the confidence and influences the large part of the local small and middle sized companies. Do you have background information or evidence on how many depositors are actually concerned by this? Question 16: Which solution would you prefer? Please provide reasons. Would you prefer Most importantly, we support harmonisation also on this issue whether the decision is to include or exclude such institutions/depositors. Secondly, our preference is not to include and cover financial institutions, central and local governments as the amount covered is irrelevant to them; also not to include depositors who have a relationship with the failed bank due to moral hazard risks; not to cover depositors who opened their account anonymously due to money laundering risks. Either way the list of eligible depositors should be harmonised in the Directive. Question 17: Do you have background information or evidence whether a covered amount of 100 000 is relevant for companies or enterprises above a certain size? Would you prefer to keep the current approach (companies that cannot draw up abridged balance sheets may be excluded by Member States)? If not, which solution would you prefer? Please specify, which category/-ies should be used to distinguish and if so, to which amount you would limit the coverage. Please provide reasons. Would you prefer another option? Please describe. We support option (b), i.e. include certain categories of companies (small and medium enterprises - SME) and exclude others in a harmonised way. In Estonia even 50 000 can be a substantial amount due to the big share of SMEs. From the financial stability perspective it is as important to cover SMEs deposits as private individual deposits. As for the big companies, in case of the 100 000 coverage level, 65% of Estonia s big companies deposits, which are not covered today, would be fully covered. At the same time these deposits form only 1.9% of all the Suur-Ameerika 1 15006 TALLINN Telefon 611 3558 Faks 696 6810 http://www.fin.ee Registrikood 70000272 E-post info@fin.ee
6 deposits of big companies. This means that the other 35% of big companies would get back only 6.5% of their deposits in the compensation case. Thus including big companies would not have a positive effect on financial stability, rather than just increasing banks contributions to DGS. The preferable situation for the second question would be full harmonisation of this exclusion: either deposits of companies that cannot draw up abridged balance sheets are not covered or coverage for all enterprises and companies regardless of their size and using the same definition as in the Commission Recommendation taking into account also the conditions of guarantee and compensation for deposits of a group, its parent company and the subsidiaries. Please see also the Questions about eligibility of deposits and depositors. It must be also mentioned that Estonia plans to cover by the guarantee scheme also large company s deposits which are currently excluded. Question 18: Would you be generally in favour of a pan-eu DGS? If so, should there be a transition period until a pan-eu DGS should be operational? If so, how long? Please provide reasons. In principle we are in the favour of the pan EU DGS, but the conditions and details should be clearly analysed and take into consideration the different member states market and influences to already existing guarantee schemes. Also Estonian private sector is in favour of a pan-eu DGS. It is clearly understandable that the transitional period is needed in some cases to follow up the new framework of EU financial supervisory developments and results. That is why the supporting of pan EU DGS depends strongly of factor like: which are the mutual participants of established pan-eu scheme (either only big or all cross-border banks); whose responsibility is to finance the scheme and which kind of financing model will be used and finally how and in which level the deposits will be covered. But it seems also beneficial for a small country to participate in a greater DGS, as the relative costs running a small independent DGS are much higher. Structure of a potential pan-eu DGS There seem to be at least the following options concerning the possible structure of a potential pan-eu DGS: (a) Single entity replacing the existing DGS (b) A DGS that is complementary to existing DGS that would support the existing DGS if needed ("28th regime") (c) "European system of DGS" (i.e. a network of schemes in the Member States that provide each other mutual assistance if needed, e.g. by borrowing from each other) Question 19: Which solution would you prefer? Please provide reasons. Would you prefer If you support option (c), please indicate how in your view, such mutual assistance should be provided. Should mutual guarantee schemes and voluntary schemes (see question 8) be integrated into a pan-eu DGS? If so, how? We believe that the transition to the pan European DGS should be step by step and first step could in that light be by implementing the option (b) where the pan EU DGS will be the complementary and applied mainly to the cross-border banks and supporting the already existing DGS s if needed. Estonian private sector view is that there is a need for a thorough study to have bigger picture for selecting the best option. Credit institutions in Estonia at the same time are not in favour of the increase of contribution (at the time being). With regard to the scope of a potential pan-eu DGS, there are at least the following options:
7 (a) All banks should contribute to a potential pan-eu DGS (b) Only large cross-border banking groups (i.e. banks with a certain systemic relevance that have subsidiaries in other Member States) (c) All cross-border banks (i.e. those who operate directly or by means of branches in other Member States than in the one where they are licensed) Question 20: Which solution would you prefer? Please provide reasons. Would you prefer In case of the previously mentioned option where pan EU DGS will be the complementary to the local DGS s and applied to the cross-border institutions, then we can support option (c). There should also be a possibility for the Member State to join fully with the pan-eu DGS without a national DGS in case there are only a few banks in the state and running a DGS only for them is not economically viable. Mandate of DGS. The following options could be considered: (a) Retain current approach (other DGS functions than paying out depositors within discretion of Member States) (b) DGS provide liquidity assistance to banks in need (c) DGS participate in the reorganisation of banks (d) DGS play an active role in the winding up of banks Question 21: Which solution would you prefer? Should this solution be recommended or mandatory? Please provide reasons. Would you prefer Would a broader mandate fro DGS require a different funding mechanism or a higher level of funding? If you prefer a pan-eu DGS (Question 18), please precise which options you would prefer in that case. At present framework of deposit guarantee schemes, the current approach (option (a)) would be preferable and practical. If there are no burden sharing agreements between Member States, it is not reasonable give more mandates to DGS as there now are due to cross-border banks. If burden sharing can be agreed between Member States then other mandates can and should be considered. But at the same time considering that the just the pay box function might be inefficient and will not take into account modern market conditions and needs there might also be need for enlargement of the deposit guarantee schemes conception. Therefore all those option should be considered and deeply analysed the need of harmonising them. Harmonisation of the information for depositors. In order to ensure that all depositors throughout the EU get the same information, it could be considered to recommend or prescribe a template for standardised information. This template could be annexed to the Directive or be developed by stakeholders. Question 22: Which solution would you prefer? Please provide reasons. Would you prefer Estonian Guarantee Fund expressed its view, that the valid Directive already gives an almost complete prescription about the information for depositors and requirements for Member States. Therefore the improvements of directive (except in Question 24) on this area do not give additional result. For example during the IV quarter 2008 requests from depositors to the Guarantee Fund could be divided into three broad groups: eligibility of deposits and depositors, set-off questions and questions on compensation limits or other guarantee terms in branches of foreign credit institutions operating in Estonia. The mentioned elements (especially exclusions not measurable) of deposit guarantee and compensation scheme were complicated and not Suur-Ameerika 1 15006 TALLINN Telefon 611 3558 Faks 696 6810 http://www.fin.ee Registrikood 70000272 E-post info@fin.ee
8 understandable for depositors every time in the situation where the DGS of foreign branches and local banks were different. This indicates that the harmonisation of Directive would be highly appreciated as well as better information sharing from foreign branches. Estonian private sector specified that the European standardised information sheet (ESIS) might work. It will definitely help depositors to receive information in unified format. Therefore Estonian general support goes to customer s education and equal treatment - that means also that the information provided to the depositor should be harmonised at the EU level. Advice to split up deposits between banks. Currently, depositors do not have to be informed that it is safer to split up deposits if the coverage limit is exceeded. Question 23: Should such information be required or recommended? Please provide reasons. Would you prefer Please see also answer to question 4. Estonia believes that it is not necessary to require from the deposit takers, which means banks to recommend to split up deposits if the coverage limit is exceeded, but to explain for the client how his or her money can be protected more efficiently. Similarly has been produces also responsible lending principles why can not also responsible deposit taking principles be relevant. This information (the recommendation) shall be disclosed on ESIS. When and how should depositors be informed? The following options could be considered: (a) Retain current approach (details left to the discretion of Member States) (b) Mandatory reference to information on DGS in advertisements (c) Mandatory reference to information on DGS on account statements (d) Require depositors to countersign information on DGS before entering into a contractual relationship and to receive a copy. Question 24: Which solution(s) would you prefer? Please provide reasons. Would you prefer In principle depositors should be informed beforehand. One option is also voluntary code of conduct, similarly to pre-contractual information on home loans. DGS participants take the obligation to disclose necessary information in the harmonised form (in the standardised format - ESIS). Options (c) and (d) are not preferred as these great inconveniences (additional bureaucracy) also for the depositors (making deposits, after account has been opened, and seeing the account statements are in large extent internet banking services). Information in case of a bank failure. With regard to the question, from which DGS depositors should receive information when their bank fails, the following options could be considered: (a) Retain current approach (Home country scheme must inform) (b) Host country DGS must inform depositors at branches in another Member State (c) Individual agreement between DGS about who informs depositors Question 25: Which solution would you prefer? Please provide reasons. Would you prefer Which approach would you prefer in case of a pan-eu scheme not being a single entity (see question 19)? Please explain. Option (a) is preferable. Because at the present situation it could be a very hard task for host country DGS to inform the depositors of branches of foreign banks due to the big differences
9 between the guarantee schemes of both countries and also due to the legal reasons. At the same time the cooperation included individual agreements between home and host country DGS would be appreciated. Nevertheless, considering that there might be failures of international banks, having branches in other Member States and information shall be provided to all depositors simultaneously, there is a need for other options. Set-off arrangements. The following options could be considered (please note that the options below are not mutually exclusive): (a) Retain current approach (unlimited set-off; within discretion of Member States) (b) Discontinue or limit set-off for the payout of depositors (c) Discontinue or limit set-off in the insolvency procedure (when the DGS has subrogated into the depositors' claims against the bank) (d) Limit set-off to claims that have fallen due or are delinquent (e) Limit set-off to a certain amount or percentage of covered deposits but leave it optional (f) Encourage depositors to split deposits and liabilities between different banks (rendering set-off obsolete if this encouragement is effective) Question 26: Which solution would you prefer? Please provide reasons. Would you prefer Set-off arrangements limits are essential because the loans are usually long term the deposits (especially demand deposits) are on the other hand are short term products, but in some extent also term deposits are met to cover everyday expenses of the consumer. In that sense if we would set-off demand deposits and home loan claims, then very large part of population would distress with covering the everyday expenses. That is why the critical minimum should definitely left for paying off to the depositors. Ideally the set-off arrangements should be enable only for the claims fallen due. Generally we support the option (d). In order to ensure the fair competition it is preferred to harmonise set-off principles. Current Estonian law establishes a set-off of outstanding liabilities (deposits shall not be compensated for the owner of which have outstanding liabilities to the same credit institution, to the extent of such liabilities). There are two reasons first, if depositor s liabilities exceed assets he won t be left without necessary money to live; second, when assets exceed liabilities (for example if one has a 100 000 deposit and a 60 000 loan, in case of a bank failure one would get reimbursed 40 000 and have no liabilities left, as the person without a loan would only get back 50 000 from his initial 100 000 deposit) it would create a distortion in the market. Payout delays. In order to reduce payout delays as such, the following options could be considered (Please note that the options below are not mutually exclusive): (a) Retain current approach (4-6 weeks from end 2010 onwards) (b) Reduce payout delay to one week after a certain transition period (c) Differentiate payout delay, i.e. a longer payout delay only for depositors where set-off has to be calculated or whose eligibility has to be thoroughly examined Question 27: Which solution would you prefer? Please provide reasons. Would you prefer Although Estonian private sector supported the option (c), Estonian general support, taking into account the IT development of the financial sector goes to option (b) - reducing payout delay to one week after a certain transition period would be preferable. Fast or instant payout should be considered only for those deposits which have clear Suur-Ameerika 1 15006 TALLINN Telefon 611 3558 Faks 696 6810 http://www.fin.ee Registrikood 70000272 E-post info@fin.ee
10 conformation of their eligibility and clear balance - for deposits falling into doubtful criteria s then there should be left possibility to delay payout. Alternative solutions. As an alternative (or supplementary) to a mere reduction of the payout delay, it could be considered to transfer deposits to another bank or to have an emergency payout procedure in place (e.g. 10 000 within 3 days). Question 28: Would you prefer such solutions? If so, on a voluntary or mandatory basis? Please provide reasons. Would you prefer any other option? Please describe. All solutions which reduce payout delays are worth to consider. On the one hand Estonian DGS is of the opinion that emergency payout procedures should be avoided because the discretion of DGS institution would be too high. On the other hand Estonia support solutions to shorten the delays for payouts as it increases depositors confidence in the DGS. Thus there is a need for further studies to determine the best solutions for this matter. Payout modalities. In order to achieve clear and fair payout modalities, the following options could be considered (please note that the options below are not mutually exclusive): (a) As regards the calculation of payout delay, it could be considered to calculate the payout delay and the delay to determine a payout situation in calendar days (b) As regards the currency of payment, it could be considered to leave this within discretion of Member States (current approach) or in the same currency as the deposits were paid in. (c) As regards interest payment, it could be considered to leave this within the discretion of Member States (current regime) or to pay interest that has not been credited at the time of failure. Question 29: Which solution(s) would you prefer? Please provide reasons. Would you prefer any other option? Please describe. The specification of the payout need for further studies. Although if the time-schedule is very short for determining the payout or for the payout itself, it is hard to follow the calendar days because certain procedures can not be proceeded on holidays for some depositors it is essential that there will not be unreasonable delays for payout that is why Estonia supports the option (a) that the payout delay should be calculated in calendar days. The payout itself should be in national currency of the Member State. The payout should also be included the cumulated, but not yet credited interests. The preferable solution would be if the interest should be calculated up to the date on which the deposits become unavailable Verification of claims. In order to facilitate the verification of claims, the following options could be considered (please note that the options below are not mutually exclusive): (d) 'Tag' eligible depositors when account is opened and then regularly keep up to date this information on account statements. (e) Payout under reserve of later reclamation verification only after payout (f) Simplify eligibility criteria (see Questions 13-16) (g) Harmonise eligibility criteria (see Question 12) (h) Introduce a de-minimis rule (i.e. deposits below a certain size, e.g. 10 would not have to be paid out) (i) Limit or abandon set-off (see above) Question 30: Which solution would you prefer? Please provide reasons. Would you prefer Verification issues need for further studies, but Estonia supports harmonization of verification process, which in general should be simple and clear to understand to all parties concerned
11 (depositors and deposit takers). To 'tag' eligible depositors at the opening stage of an account and then regularly keep up to date this information on account statements is a good idea. Taking into account the high development of information systems in financial sector and especially in banks this procedure in general is in use already today. It is also preferable that the verification is done before the payout ideally regularly overviewed. Later reclamations if they are in large quantities would damage the reputation of DGS. However the possibility of later reclamation should remain because there could be mistakes in the payout process. Application for reimbursement. In order to facilitate the application for claims, the following options could be considered: (a) Retain current approach (depositors may have to take initiative, to fill in application forms and send them electronic processing and own initiative payment within discretion of Member States) (b) Payments by DGS on their own initiative without need for applications only electronic request to depositors asking them to indicate new account or payment to the same account whenever feasible Question 31: Would you prefer one of these solutions? If so, on a voluntary or mandatory basis? Please provide reasons. Would you prefer Option (b) in general would be preferable for Estonia. At the same time and in the light of highspeed payout requirement of compensations it is not clear yet how the DGS would get the data from depositors. At least the DGS should be in a position to precede a rapid payout of compensations if they get the necessary data from depositors. Ideally there should be some kind of technical solution, where clients could using their Internet banking passwords or ID-card enter their alternative account number in a another bank, where to the payouts can be transferred. Involving DGS at an early stage. In order to involve DGS at an early stage, it could be considered to require competent authorities to inform DGS either if appropriate (current approach) or by default when triggering of DGS becomes likely. Question 32: Which solution would you prefer? Please provide reasons. Would you prefer We support retaining current approach, as it creates less disorder and eliminates unjustified payouts. The Estonian Guarantee Fund has expressed its view that present requirement of the Directive is not an obstacle for DGS. In general in order to achieve quick payment and avoid extensive market distortion the DGS should be involved at early stages that is why the competent authorities should also be required to inform DGS when the triggering event is duly possible in appropriately early stage. Information exchange between banks and schemes. In order to improve information exchange between banks and schemes it could be considered to recommend or require that DGS have access to relevant banks' records when DGS are informed by competent authorities and that DGS and their member banks have a common interface to quickly exchange information Question 33: Which solution would you prefer? Please provide reasons. Would you prefer Suur-Ameerika 1 15006 TALLINN Telefon 611 3558 Faks 696 6810 http://www.fin.ee Registrikood 70000272 E-post info@fin.ee
12 Proposed solutions are relevant, and the common interface is quickest and most convenient solution for information exchange. Estonia in general supports creation of separate information exchange interface, to the end that effective and modern information exchange channel would lessen the time spent for the formalities of information exchange between the banks and guarantee schemes at the same time we should not forget to assure data protection, security and personal data Proven capability of DGS to handle payout situations effectively. In order to ensure that DGS are capable to deal with payout situations, the following options could be considered: (a) Retain current approach (stress testing required in general) (b) Require DGS to regularly disclose the amount of ex-ante funds, their workforce and the result of regular stress testing exercises (c) Make such disclosure (as referred to under point b) a precondition for cross-border services or establishment of branches (d) Regular peer review among DGS Question 34: Which solution would you prefer? Please provide reasons. Would you prefer Current approach that means option (a) would be preferable and sufficient because the DGS institutions in Member States are different. The Estonian Guarantee Fund has disclosed on regular basis the amount of ex-ante funds and their workforce. In 1998 the Fund paid out compensations to the depositors of two banks that mean the experience is very low and insufficient to carry out comprehensive analyses. Topping-up arrangements. The following options could be considered: (c) Retain current approach (topping up within discretion of Member States; host country topping up regulated in some detail by the Directive (Annex 2) but home country topping up permitted) (d) Make topping up mandatory in whatever form (e) Recommend home country topping up (f) Making home country topping up mandatory (g) Making host country topping up mandatory (h) Discontinue topping up Question 35: Do you consider topping up a problem? If so, which solution would you prefer? Please provide reasons. Would you prefer In general we support total harmonisation of Member States DGSs and thus there would be no need for topping up. As topping up is a very theoretical concept because it should be used practically only in this case when there is a difference between the compensation level and all the other elements of the DGS of local banks and branches of foreign banks are equal which not a case in every Member State is. But if needed in order to protect depositors topping up should be mandatory. For example third country s subsidiary or a branch from should be forced to join the DGS in order to protect host country s depositors. Therefore the preferable solution for us would be (h) in case the coverage level in all Member States is the same or less robust solution (c) taking into account the further harmonisation of the Directive. Estonian private sector believes that in order to safeguard conditions of fair competition, the branches of foreign banks shall be subject to the same treatment and coverage as local banks (including subsidiaries of foreign banks). Cross-border cooperation between DGS. It could be considered that a DGS in a host country acts as a single point of contact for depositors at a branch in the host country. This
13 could encompass features such as post box services, advice in the host country s language or being a paying agent for the home country DGS. Question 36: Which solution would you prefer? Please provide reasons. Would you prefer Ideally the best solution for the depositors is to provide contact person from the country from where it has used the services even thought the deposit guarantee is provided by the foreign country (home country) deposit guarantee schemes. It will simplify significantly for example language problems in case of disbursement formation, for example Estonians who have deposits in some other Member State s bank could present disbursement application in Estonian language. Therefore the Directive should provide a framework, which would make cooperation between home and host-country DGSs mandatory, so that to host country DGS works as a gateway for local depositors. So depositors can be sure where to turn and get information in their native language if a bank should fail. Taking into account that there are considerable differences in the banking system and legislation of Member States and also in the institutional framework of DGS organisations, it is preferable that the improving of the mutual cooperation of DGS would take place step by step. Therefore the DGS of Member States should find the optimal solutions of cooperation by themselves. Level of funding of DGS. On top of improving the financing mechanism (Question 39) and a possible introduction of a pan-eu DGS (Questions 17-19), it could be considered to recommend or require a target level (certain percentage of deposits) for ex-ante funds, expost contributions and alternative means of financing (e.g. borrowing). A maximum level for the contribution of banks could also be considered. Question 37: Which solution would you prefer? Please provide reasons. Would you prefer Differences of Member States guarantee schemes financing mechanisms are the main differences between different Member State guarantee schemes. Estonia definitely supports harmonization of financing mechanism, but also setting the similar rules for alternative financing recourses, like lending from the market or using public funds etc As the mandatory ex-ante funding requirement in a Directive itself does not solve the DGS funding without additional specifications about the target level of the fund, contributions and alternative means of financing the requirements compare to recommendation would be referable. At the same time all these elements basically derive from the banking structure of a certain Member State which makes the detailed prescription through the Directive almost impossible. Therefore an optimal solution would be if there is some kind of balance between the Directive requirements and Member States legislation. We support harmonisation in this issue and also strongly support ex-ante funding. Also Estonian private sector is convinced that ex-ante funding is justified and reasonable. Therefore we think it should also be mandatory for all Member States. Risk-adjustment of contributions to DGS. It could be considered to introduce risk-based contributions on a voluntary or mandatory basis. Particular models could be recommended or required. Question 38: Would you prefer introducing risk-based contributions? Which models would Suur-Ameerika 1 15006 TALLINN Telefon 611 3558 Faks 696 6810 http://www.fin.ee Registrikood 70000272 E-post info@fin.ee
14 you envisage? Please provide reasons. Please describe. Estonia as in general has an opinion that moving towards ex ante risk based financing model could be the advance approach in enhancing the deposit guarantee schemes. In that sense it is necessary to analyse it more deeply in order to consider the risk based financing as an obligatory financing model for all guarantee schemes. We support developing a simple and unified riskbased contribution model that could be attributed in all Member States. If such a model is introduced, it should be made mandatory throughout the EU to ensure a level playing field. Estonian private sector said however that they think there is not yet sufficient data and experience to make preferences. Funding mechanisms. It could be considered to make ex-ante funding mandatory and to require alternative short-term (interim) financing or long term borrowing in case of need. Question 39: Which solution would you prefer? Please provide reasons. Would you prefer If you prefer interim financing, please describe how and by whom such financing should be provided. See also answer to question 37. In general Estonia support the mandatory ex-ante funding, but we also think that other alternative funding as borrowing from the market or use of public funds need to be harmonized at the EU level.. The Estonian Guarantee Fund has expressed its view that mandatory ex-ante funding would be the first step but not the only one to harmonise DGS and remove a competitive distortions because the mandatory ex-ante funding requirement itself does not solve the appropriate Fund size, target level and the speed of collecting contributions from banks if the banking structure of a specific country vis-à-vis the other Member States or some other matters are not taken into account. Therefore ex-ante funding requirement harmonisation need some additional specifications (please see Question 37). 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. As also mentioned before Estonia thinks that there is a need for giving a definition for deposit and which kind of deposits (to what criteria s do those deposits have to meet) are covered. Best regards, Helen Korju Expert Estonian Ministry of Finance Financial Markets Division Phone +3726 113 681 Email helen.korju@fin.ee