Reforms of the German voluntary deposit protection scheme on the horizon

On 8 December 2021, the Association of German Banks (Bundesverband deutscher Banken – “BdB”) issued a statement that it had resolved to reform of the voluntary deposit guarantee scheme of private banks (Einlagensicherungsfonds – “ESF”). The most significant changes include:

• Gradual decrease in the maximum deposit protection per depositor to EUR 1 million as of 1 January 2030 for natural persons and EUR 10 million for companies;
• Limiting protection to deposits in Germany - deposits in foreign branches of German banks will no longer be protected; and
• Narrowing eligibility criteria and excluding most of the public sector as well as further financial undertakings, such as insurance undertakings or investment funds.

The BdB has so far only issued a press release and answered some questions on the envisaged changes, which leave some key issues open. The by-laws of the ESF, which are yet to be revised, will hopefully address these issues and provide more clarity for all market participants.

Role of the ESF in Germany

Deposit protection in Germany is based on two pillars: The statutory deposit guarantee scheme on the one hand and a voluntary deposit guarantee scheme on the other.

• The statutory deposit guarantee scheme protects eligible deposits of up to EUR 100,000 per depositor in the event of a bank’s insolvency. The statutory deposit guarantee scheme for private sector banks – and since 1 October 2021 also for public sector banks – is the Compensation Scheme of German Private Banks (Entschädigungseinrichtung deutscher Banken – “EdB”).
• The voluntary deposit guarantee scheme of Germany’s private sector banks is the ESF, which is made up of the members of the BdB. All members of the BdB are generally automatically members of the ESF. This includes German credit institutions, German branches of EU-credit institutions and branches of third country institutions. The ESF offers a higher level of protection, which is capped per depositor at a maximum of 15 % of the regulatory own funds (Art. 72 CRR) of an institution.

The published reforms of the deposit guarantee scheme only relate to the voluntary deposit guarantee scheme, the ESF.

Envisaged changes

The ESF is envisaging a number of changes regarding the eligibility of certain depositors for protection and the coverage levels. 

Reduction of coverage levels

Natural persons, companies, foundations and charitable institutions will generally remain eligible creditors of the ESF. Coverage levels for these depositors, however, will be gradually reduced as follows:

This significant reduction of coverage, down from 15 % of the own funds of an institution, is an acceleration of an overall trend. A downward trajectory of ESF coverage levels is already stipulated in the ESF by-laws, which currently provide for a reduction to 8.75 % of an institution’s own funds by 2025 (§ 6 (8) (a) ESF by-laws). The newly published amendments will supersede this already existing decrease and further contribute to lower overall coverage levels.

Focus on deposits in Germany

The ESF also envisages a stronger focus on German deposits. Customers of foreign branches of German banks will no longer be protected by the ESF as of 1 January 2023. However, for the avoidance of doubt,

• deposits at EEA branches of German credit institutions will remain covered by the statutory deposit protection scheme (§ 56(1) EinSiG); and
• the envisaged amendment will also not have an impact on German branches of foreign banks.

Reduction of eligibility for institutional and public sector depositors

A further significant amendment concerns corporations governed by public law (öffentlich-rechtliche Körperschaften) and institutions governed by public law (Anstalten des öffentlichen Rechts), who will no longer be protected under the voluntary deposit guarantee scheme. This amendment will impact a wide variety of public sector depositors, such as public universities, German state-owned media (such as ARD and ZDF), public hospitals and the Catholic church. The German federal government, the federal states, municipalities and other local authorities, as well as foreign states are already not protected under the current ESF by-laws (§ 6 (4) (d) ESF by-laws). As a result of the envisaged amendment, most of – if not the entirety of – the German public sector will, therefore, no longer be eligible for deposit protection.

The ESF reforms will also further restrict eligibility for deposit protection for institutional investors. Further to CRR credit institutions, investment firms and certain financial institutions that are already excluded under the current version of the ESF statutes (§ 6 (4) (a) – (c) ESF by-laws), the reform will now also exclude investment funds and insurance undertakings. Only institutional investors who are legally obliged to invest their deposits in a protected manner, such as social security funds, will continue to be protected under the regime for corporations. The stated rationale behind all of these changes is the increased protection of depositors that are in need for protection, which apparently translates to natural persons with deposits of up to EUR 1 million and corporations with deposits up to EUR 10 million. The immediate cause for this reform is likely to be the insolvency of the Greensill Bank in March 2021. The BdB already noted shortly after the insolvency that it would consider reducing eligibility to avoid that public depositors would “park” their funds at private banks. In addition, Germany’s traditionally high savings rate, the low interest rate environment and the ongoing impact of the Federal Court of Justice’s (Bundesgerichtshof) judgment of 27 April 2021 on banks’ amendment mechanisms may be further, more underlying causes that prompted these changes.

Timing and grandfathering

The first changes will apply as of 1 January 2023, with the remaining changes to be introduced in two further stages, with the last changes taking effect on 1 January 2030.

So far, the BdB has only announced that amounts deposited before 1 January 2023 will be grandfathered. The conditions and scope of the grandfathering have not yet been published. However, it seems likely that the BdB will use a grandfathering mechanism akin to past amendments of the ESF statutes. For past reductions of coverage levels, the BdB has, for example, stipulated that deposits will be protected under the old protection levels until the next maturity or termination dates (§ 6 (8) (d) sent. 5 ESF by-laws). However, only the publication of the revised by-laws will – hopefully – provide much needed guidance on this key question.