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Deposit guarantee schemes – part 2 - 12/07/2010

Piggy bank receiving euro notes ©EU

Proposals to improve protection for bank account holders and retail investors, and set up similar schemes for insurance policies.

The commission tabled new rules today to better protect customers of banks, investment firms or insurance companies that go bankrupt – part of an effort to restore confidence in financial services.

The package is the latest addition to a growing body of EU legislation spawned by the financial crisis and aimed at making the industry more transparent and accountable.

One part concerns an EU law that requires countries to have in place funding schemes for reimbursing depositors when banks fail and that stipulates a minimum guarantee.

Last year the EU raised the minimum from €20,000 to €50,000 in a two-step process that will see coverage fixed at €100,000 by the end of this year.

The higher fixed guarantee should prevent bank runs caused by customers shifting deposits to countries with better coverage – as they did in 2008 during the first panicky weeks of the crisis in Europe.

The new rules would set a tighter deadline for reimbursing depositors. Currently banks have three months. The commission wants payouts within a week after a bank fails – as in the US.

Another proposal aims to ease concerns about whether national deposit guarantee schemes have sufficient funds. Banks would pay into the schemes on a regular basis, with riskier banks making bigger contributions. In a pinch, schemes would be able to borrow from each other.

Not limited to household accounts, the revised law would extend coverage to businesses, currently excluded from some national schemes. It would also allow reimbursements in other currencies.

The commission is calling for similar changes to investor compensation schemes. These schemes offer protection from fraud, malpractice or problems with operating systems – but not from investment risk.

The compensation payable to investors would rise from a minimum of €20,000 to a fixed level of €50,000. There would be more protection from Madoff-like frauds.

The proposals are subject to approval by the council and parliament.

Plans were also announced to extend similar protection to insurance policies. Some countries already have insurance guarantee schemes but there are no EU-wide rules. A public consultation is under way.

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