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European Union: Proposal on Deposit Guarantee Scheme

(Apr. 9, 2013) The current banking crisis in Cyprus sparked debate at the European Union (EU) level as to whether bank depositors should be immune from bail-ins for troubled banks or whether only deposits in excess of €100,000 (about US$130,000) should be subject to a tax. (Bail-In Blues: Luxembourg Warns of Investor Flight from Europe, SPIEGEL ONLINE INTERNATIONAL (Mar. 29, 2013).) A “bail-in” refers, in simple terms, to depositors forfeiting part of their investment and thereby bailing in a bank that otherwise could face bankruptcy, before taxpayers must step in to bail out the bank. (Bail-In, FINANCIAL TIMES LEXICON (last visited Apr. 3, 2013).)

The initial deal for Cyprus, which was reached on March 16, 2013, by the euro-zone Member States and endorsed by the European Central Bank and the International Monetary Fund, called for imposing a one-time tax on deposits held in Cypriot banks in exchange for a €10 billion bailout. The rate was 9.9% for deposits exceeding €100,000 and 6.7% for deposits of less than that. The deal was subsequently vetoed by the Cypriot Parliament. (Press Release, Ministry of Finance Announcement, Agreement for a Financial Assistance to the Republic of Cyprus (Mar. 18, 2013).)

A tax on bank deposits of less than €100,000, if imposed, would have been incompatible with EU law, which guarantees deposits up to that amount. There are two relevant EU directives governing bank deposits: 1) Directive 2009/14/EC of the European Parliament and of the Council of 11 March 2009 Amending Directive 94/19/EC on Deposit-Guarantee Schemes as Regards the Coverage Level and the Payout Delay(O.J. (L68) 3); and (2) Directive 1994/19/EC of the European Parliament and of the Council of 30 May 1994 on Deposit-Guarantee Schemes (OJ. (L 135) 5). Thus, as of December 1, 2010, in compliance with the 2009 Directive, EU Member States have been required to guarantee deposits up to €100,000.

The EU’s deposit guarantee schemes were designed to prevent situations such as the one now affecting <?Cyprus. The rationale behind the deposit guarantee schemes is to curb mass withdrawals from banks ready to collapse and to mitigate the overall effects of loss of public confidence in banking institutions. Consequently, a measure to tax deposits, which has never happened before in the history of the euro zone, would place at risk the entire existing deposit guarantee system. As Roberto Henriques, an analyst at JPMorgan Chase & Co. in London, wrote in a report to clients, “[t]his will be the death knell for an EU Common Deposit Guarantee scheme.” (Liam Vaughan & Elisa Martinuzzi, Cyprus Bank Tax Threatens European Deposit Guarantees Plan, BLOOMBERG.COM (Mar. 19, 2013).)

A pending EU proposal dating back to 2010, which is currently under consideration before the EU Parliament and the Council, aims to provide a more secure legal regime for deposits. It requires that all banks and financial institutions, without exception, join a deposit guarantee scheme. The proposal also defines more clearly what falls within the definition of deposits, specifying that it is only entirely repayable instruments that can be deemed deposits. (Directive …/…/EU of the European Parliament and of the Council on Deposit Guarantee Schemes [Recast], COM (2010)368 final 12.7.2010.)

More importantly, in order to ensure that depositors are aware of the risks involved, the plan requires that, prior to making a deposit, all depositors sign a form that will indicate whether or not their deposits are guaranteed. It also allows EU Member States to cover deposits arising from real estate transactions and deposits relating to particular life events above the limit of €100,000, provided that the coverage is limited to 12 months. (Id.)

In addition, the pending EU proposal gives EU Member States the discretion to establish a separate system, apart from the deposit guarantee schemes, to protect pensions, “certain deposits for social reasons,” or deposits related to real estate transactions for private residential purposes. (Id.)

The European Parliament, which will vote on the new proposal sometime in April, seems to be eager to impose a mandatory tax on private savings in excess of €100,000. Gunmar Hokmark, a European Parliamentarian from Sweden who is in charge of this issue in the Parliament, said that its members will endorse the decision for a mandatory bail-in for large deposits. (EU Lawmakers Divided on Compulsory Bail-Ins for Savers, EU OBSERVER (Mar. 27, 2013).)