Deposit insurance for credit institutions and securities trading firms, Part 1

When maybe only 100,000 euros are secured and the rest becomes a restructuring profit for the bank….

The Financial Market Authority cannot prevent the insolvency of credit institutions, securities trading houses or insurance companies. For securities trading companies, the maximum compensation obligation is 90% of up to EUR 20,000. In the past, there was the bail-out, i.e. the restructuring of the banks by the taxpayer – the “Greek aid” did not reach the Greek people, but investors and banks.

Today there is the bail-in, i.e. the restructuring of the banks by their customers (who may then only receive up to 100,000 euros in compensation) and the shareholders – when the bank has to be wound up. Almost 600 US bank failures since 2007 are documented on the Internet (http://bankimplode.com/) – including those in Germany (e.g. http://www.euronetwork.de/pages/die-ursachen.php).

The model for the bail-in is the Cyprus banking crisis in 2013, in which investors lost up to more than 80% of their deposits, probably more than 11 billion euros in total – some of it untaxed money, including money from the former Eastern Bloc. Mockers called this an “EU experimental laboratory”.

Anyone who is liable as an asset manager or trustee for the loss of invested funds due to the insolvency of the investment bank, does not have to be liable for the return of the funds in accordance with § 667 BGB regardless of fault, but is solely liable for damages in accordance with §§ 280, 283 BGB in the event of a breach of duty for which he is responsible. But mostly the money is gone – and nobody is to blame. Therefore, it must be ensured that there is no statutory deposit insurance at the credit institution that is too low (BGH, ruling of 21.12.2005, ref. III ZR 9/05).

As a general rule, pursuant to Section 23a of the German Banking Act (KWG), credit institutions must inform the customer in an easily understandable form about the provisions applicable to the collateral, including the scope and amount of the collateral, before entering into the business relationship. The reference in general terms and conditions is sufficient. “According to general principles, the customer must prove that the bank has not fulfilled its duty to inform.” (German Federal Court of Justice, judgements of 14 July 2009, Ref. XI ZR 152/08 and XI ZR 153/98).

Federal Supervisory Office for Financial Services (BaFin)

Visiting the website (www.bafin.de) gives the deceptive impression that it is a consumer protection agency. BaFin tries to secure the existence of the financial institutions – including the insurance companies – “in the public interest, and not in the interest of investors and customers”, and is regularly not liable for its own mistakes or those of its assistants (special auditors) (BGH, ruling of 26.06.2001, ref. X ZR 231/99 and ruling of 07.05.2009, ref. III ZR 277/08). This applies, for example, to renowned special auditors and accountants who do not recognise clumsy document falsification or losses made over several financial years.

In the case of securities trading houses, for example, BaFin simply says: “The Federal Financial Supervisory Authority (BaFin) announces in accordance with Section 5 (1) sentence 4 of the Deposit Guarantee and Investor Compensation Act (EAEG) that the compensation case has been established at Institut Dr. Seibold Capital GmbH in Gmund am Tegernsee. (http://www.e-d-w.de). A warning beforehand cannot be in the public interest for BaFin, because it might cause panic if everyone is still trying to save their money – and attracting a sufficient number of new unsuspecting investors could still contribute to the rescue, i.e. be in the public interest.

Compensatory Fund of Securities Trading Companies (EdW)

The EdW compensates the investor claims from securities transactions, securities to be issued at market value and cash balances to be paid out – even in the event of embezzlement and misappropriation. No compensation is paid for fictitious profits from snowball systems and losses due to faulty investment strategy in asset management, even if the security has lost value and may have become worthless. However, there may be a right to segregation in the event of insolvency of the securities account, Section 47 of the German Insolvency Code (InsO) – in which case no compensation will be paid.

The investor usually learns little or nothing about the causes of the crisis, for example that an asset manager ran his business more like a casino on the stock exchange, or embezzled funds, or repeatedly took on the highest risks “against the market” without security. There may be little evidence of this in the press, and lawyers who, if necessary, under the Freedom of Information Act (IFG) must first file a complaint against BaFin for information or inspection of files (Administrative Court Frankfurt/Main, judgement of 23.01.2008, Ref. 7 E 3280/06 (V)) By law, BaFin is generally subject to official secrecy.

The list of asset managers in insolvency suggests that there are likely to be many billions of uncompensated losses, including those from flawed investment strategies and pyramid schemes. Through appropriate insurance policies, but also through shadow accounting as well as controlling and monitoring of their own asset managers, some clients of insolvent asset managers could often have saved themselves the loss of their assets.

EU plans gradual European deposit insurance from 2017

A “European Deposit Insurance Scheme (EDIS)”, similar to a credit insurer, is initially intended to supplement and relieve the burden on national statutory compensation, until national compensation is abolished from 2024. Then the compensation scheme is called the “Single Resolution Board (SRB)”. Critics speak of the plan to communitise (bank) debt in the EU banking union in favour of ailing foreign banks, because it is a merger of national statutory deposit insurance schemes. If too many and/or too large banks go bankrupt in too short a time, the EU states will probably have to step in and burden the taxpayer (bail-out).

So far, there is no European deposit guarantee scheme. However, there are European requirements for the EU member states to design their statutory national deposit guarantee schemes. These are laid down in the Deposit Guarantee Directive and offer up to more than EUR 100,000 as compensation in the event of a credit institution’s insolvency.

100,000 Euro guarantee by implementation of the Deposit Guarantee Directive

On July 3, 2015, the new German Deposit Guarantee Act (EinSiG), which transposes the revised Directive 2014/49/EU of the European Parliament and of the Council of April 16, 2014 on deposit guarantee schemes into German law, came into force.

As a result, customers of credit institutions in the EU receive a guarantee from bank-financed deposit protection funds. The Deposit Guarantee Act (EinSiG) also affects Landesbanken, Landesbausparkassen, savings banks and Volks- and Raiffeisenbanken. Up to EUR 100,000 per saver and bank (§ 8 I EinSiG), so that risk diversification is always an option, as a trend towards a second or third bank.

In accordance with § 8 II, III, IV EinSiG, a cover amount of up to a total of 500,000 euros is possible if, for example, funds

• 1.5 billion from real estate transactions with privately used residential properties,
• which fulfil social purposes provided for by law and are linked to certain life events, such as marriage,
• Divorce, retirement, retirement, termination, dismissal, birth, illness, need for care, disability, handicap or death
• through payment of insurance benefits,
• for compensation for damage to health resulting from acts of violence or for damage caused by unjustified law enforcement action Only payments made up to six months prior to the claim are protected, and only if they have been separately declared to the Guarantee Fund and substantiated. Only 0.8 percent of the deposits to be covered must be included in this security fund by the end of 03.07.2024. If, in a financial market crisis, more than 0.8% of the protected deposits are lost through bank bankruptcy(s), the statutory deposit protection funds, which are apparently happy to operate as a GmbH, will have to file an application for bankruptcy with the insolvency court. “The protection scheme of the Cooperative Financial Services Group is the world’s oldest exclusively privately financed protection system for banks. From the very beginning (since the 1930s), this system has always ensured that all banks included in it were able to meet their obligations. No affiliated bank has ever been affected by insolvency, so no customer of an affiliated bank has ever had to be compensated or suffered a loss of deposits. At no time in the 170-year history of our banking group has the state provided financial support to a cooperative bank in Germany through the use of taxpayers’ money,” according to information from “BVR Protection Scheme” and “BVR Institutssicherung GmbH”.
• Private Banks
• The cooperative enjoys a certain popularity – you are a member, not just a customer. Only one cooperative bank with its head office in NRW became particularly prominent through visits by the public prosecutor’s office. Some only open accounts for civil servants and wage earners, which are then regularly managed free of charge.
• The voluntary BVR protection scheme (BVR-SE) also protects customer assets (deposit protection). Within the scope of its articles of incorporation, the BVR-SE protects all customer deposits (e.g., savings deposits, passbooks, savings bonds, time deposits, fixed-term deposits) over and above the legal protection provided by BVR Institutssicherung GmbH. Sight deposits, i.e. credit balances on checking accounts and overnight deposit accounts, and bearer bonds (insofar as these are issued by affiliated institutes and are held by customers).
• On the other hand, there has always been the voluntary protection scheme of the Federal Association of German Cooperative Banks (BVR Protection Scheme), which has been in existence since 1934 to avert or remedy imminent or existing financial difficulties at the affiliated credit institutions, i.e. to prevent insolvency (institutional protection).
• On the one hand, there is now also “BVR Institutssicherung GmbH” (statutory protection scheme under the EinSiG), which offers customers a guarantee of 100,000 euros, and in special cases 500,000 euros.
• As a reader, one wonders why the state has supported the sector of private banks with “rescue money” in the scope of several federal budgets instead of regulating it better?
• Cooperative banks
• The consequence of the “financial and sovereign debt crisis” so far is the banking union: it consists of a uniform banking supervision at the ECB, uniform bank settlement, a uniform set of rules for banks and deposit protection based on uniform standards in the EU member states. The EU Deposit Guarantee Directive was amended in 2014 to become the “Deposit Guarantee Schemes Directive” (DGSD), which was transformed into national law on 3 July 2015 by the DGSD Implementation Act – in particular by the Deposit Guarantee Act (EinSiG). Only then were savings banks and cooperative banks also affected by the (new) statutory deposit insurance.
• The “Financial Stability Board” (FSB) regularly informs which banks are globally systemically important banks (G-SIBs), with surprisingly low capital reserves of their own in the event of a crisis. In its monthly report of 16 June 2014 under the title “The new European rules for the reorganisation and winding up of credit institutions” (p. 31), the Deutsche Bundesbank writes: “In the course of the financial crisis …, which has been ongoing since 2007, the crisis continues to the present day.

There is also the statutory deposit protection fund under the EinSiG, the Entschädigungseinrichtung deutscher Banken (EdB), with assets of over one billion euros.

The Bundesbank aptly describes the scope of protection: “Secured are sight, term and savings deposits including savings bonds in the name of the Bundesbank. Bearer securities, such as bearer bonds and bearer deposit certificates, on the other hand, are not protected as in the case of statutory deposit protection. The deposit protection existing with the voluntary deposit protection fund is subsidiary, i.e. deposits are only protected insofar as they are not already covered by the statutory compensation scheme”.

The EinSiG generally provides for a reimbursement period of 20 working days (until 31.05.2016) or 7 working days (from 01.06.2016). The limit of 100,000 euros also applies if the bank operates under different brands and accounts are held there (aggregation). In the case of joint accounts, the limit of 100,000 euros per depositor applies. If it is a partnership or similar association (e.g. a club), the amount remains at 100,000 euros. The circle of protected depositors includes in particular private depositors, but deposits from companies are also eligible for compensation. A claim for compensation exists regardless of the currency in which the deposit is denominated.

There is also a voluntary “Deposit Protection Fund of the Association of German Banks”. A private bank writes about this “Exactly how much money you get is determined by our equity.” – On closer inspection, this is a downright lie: Because the bank customer has no legal claim to the services of the deposit protection fund of the private banks (LG Berlin, judgement of 15.06.2010, ref. 10 O 360/09).

The private deposit protection fund of the Association of German Banks “secures” customer deposits up to 20% of the equity capital of the respective bank. The minimum equity capital of a bank in Germany is EUR 5 million. In this case, 1 million euros per customer would already be protected. In most cases, however, this amount is significantly higher. The average protection limit is EUR 190 million per customer per bank.

There is no joint protection of the institute – one feels like a competitor throughout.

This banking sector has apparently been by far the most source of media coverage of so-called investment victims and criminal (including tax) activities.

Incidentally, negative interest on deposits is “a kind of custodian or deposit fee, which in the case of income from capital assets is recorded as income-related expenses in the saver’s lump-sum allowance in accordance with § 20 paragraph 9 sentence 1 EStG” (BMF letter of 27 May 2015, DOC 2015/0411466).

Savings banks and Landesbanken

For their customers, too, there is the statutory deposit protection fund under the EinSiG, as “institution-related protection systems” for member institutions at the German Savings Banks and Giro Association (DSGV).

The additional protection for the institutions is provided by insolvency protection for the member institutions and the Joint Liability Scheme of the Savings Banks Finance Group. If a savings bank is in difficulties, it is common practice in some places to dismiss the board of directors – the respective savings bank is then merged or amalgamated with another. There are several videos on the Internet about dubious business practices of individual savings banks.

Public banks

In addition to the Deposit Protection Fund pursuant to EinSiG (Compensation Fund of the Association of German Public Banks (EdÖ)),

there is the voluntary Deposit Protection Fund of the Association of German Public Banks (VÖB).

Building Societies

In addition to the statutory Deposit Protection Fund (with the Entschädigungseinrichtung deutscher Banken GmbH), there is also the “Bausparkassen-Einlagensicherungsfonds e.V.” as a voluntary institution. Individual building societies are positioned somewhat differently.

Lack of transparency of voluntary security schemes

Wim Duisenberg, former President of the ECB, when asked how he invests his money, said: “Personally, I am in the happy position of not having any reserves”.

However, anyone who has something to lose, i.e. does not have debts but credit balances at his bank, wonders what assets are actually available in the voluntary security schemes. There is usually no answer to this question. There is also no BaFin supervision for these voluntary institutions.

The respective voluntary security systems of private banks, savings banks and Landesbanken as well as cooperative banks appear not to be transparent. It therefore seems advisable to have a specialist look at the credit institutions’ balance sheets on a regular and comparative basis. It should be noted that financial institutions also buy risky government bonds from abroad, and generally no full risk protection is currently provided and supervised for these. It shall be the responsibility of the credit institution to conduct risk management and to avoid “cluster risks”. There are credit institutions which advertise that they expressly do not engage in such risk transactions for the purpose of maximising their own profits and bonuses of the bank(s).

The BVR describes the situation accurately: “As part of the implementation of the new Basel capital adequacy requirements for banks (Basel III and CRD IV), the European legislator has retained the exemption from capital adequacy requirements for government bonds. This means that the bank will continue to be exempt from the requirement to hold equity capital for these investments. However, investors are taking a very close look at the valuation of the individual countries. Deposit guarantee schemes, on the other hand, may only invest their fund assets in bonds with the highest credit ratings”.

No legal claim of the customer against voluntary security schemes

The voluntary security schemes function in a similar way to the relief funds (UK) in company pension schemes, because there is also no legal claim of the employee against the UK, and regularly none of the insolvency administrator (BAG, ruling dated July 31, 2007, Case No. 3 AZR 373/06; and dated September 29, 2010, Case No. 3 AZR 107/08). If the UK is insolvent, the employer has to step in – if the employer is also insolvent, the employee does not go away empty-handed but receives (often only partial) compensation from the Pensionssicherungsverein (PSV aG).

In one compensation case, the Berlin Regional Court decided in its guiding principle, inter alia, “In principle, bank customers have no legal claim to benefits from the deposit protection fund of private banks”. Of course, the lack of legal entitlement also saves costs, for example for insurance tax, insurance supervision with corresponding administrative costs. One could cautiously formulate that it always remains open whether a voluntary protection scheme will continue to compensate every depositor in all compensation cases in the future and will at no time invoke the non-existent legal right. In any case, it can never become insolvent in this way – unlike the investor concerned.

Foreign banks in Germany

The Bundesverband deutscher Banken e.V. accurately describes the situation as follows:

“Branches of credit institutions domiciled in the European Union or those of the European Economic Area are generally covered by the deposit guarantee scheme of the respective country of origin (home country principle). However, in the event of an indemnification case occurring at a foreign credit institution with branches operating in the Federal Republic of Germany, the EdB assumes the indemnification procedure for the deposit protection system of the home country on the instructions and for the account of the home country.

The situation is different for an independent German subsidiary of a foreign bank. This company was established under German law and is therefore subject to German supervisory law. The bank is therefore assigned to the EdB as the statutory compensation institution for private banks.

Branches of institutions from countries outside the EU or EEA that conduct deposit business are members of the German statutory compensation schemes.

In addition, all foreign banks can in principle also participate in the voluntary deposit protection fund of private banks”.

Foreign banks abroad

When larger assets, which are already well into the seven-figure range, are looking for professional management, asset owners are happy to have the relevant providers join the “beauty contest”. Occasionally, attention is also paid to the distribution of assets, to different banks, different currencies, different teams of advisors, in different places – i.e. for risk diversification and to allow providers (banks, asset managers) to compete against each other for (investment) success.

For smaller assets, investors need to take the initiative themselves – at best, perhaps with a fee-based advisor to assist them, for example with actuarial and banking product expertise. Asset diversification can also be geopolitical. In addition, a possible delegation also requires an independent control, as well as an own opinion and a strategy to exploit opportunities. This is by no means effortless – even abroad.

Other products, a new legal culture, and bank forms with evaluations that do not take German tax law into account are a considerable complication in dealing with foreign banks. The investment in some securities is (even already in Germany) taxed as it were. On the other hand, a simple time deposit in Canada or Norway seems almost problem-free.

Investment companies and insurance companies with fewer risks

With traditional life insurance, insurance companies must invest primarily in government bonds – including foreign ones. Shortly after the financial market crisis in 2007/2008, there was an insurer who advertised that he no longer held any Greek bonds. In the case of a debt cut (haircut), there is no full repayment of capital or redemption later.

In 2013, “Collective Action Clauses” (CAC clauses) were then added to the terms and conditions for government bonds in Europe, allowing the federal government or the vast majority of creditors to “devalue” the bonds – even then, there will no longer be a complete repayment. This general arrangement was introduced by European governments under the ESM (European Stability Mechanism) legislation. CACs are designed to facilitate the restructuring of public debt. Private customers typically may not typically buy government bonds themselves, but may already be affected by fund or insurance products that have invested in government bonds. In essence, the question is then again why numerous banks had also held bonds from Greece for those of “issuers with first-class credit ratings” – or whether bank losses originated from their investment casino departments.

Life insurers pass on these risks to their policyholders, for example by paying lower surpluses, maturity benefits or pensions. However, they can only fall below the guaranteed commitments after a supervisory procedure with the help of BaFin, which can also reduce already acquired guarantees including current pensions in order to avoid insolvency. If the life insurer is absorbed by the “Protektor” protection scheme, the guarantee benefits can be reduced by up to 5%. It is to be expected that large and small contracts will be treated equally here.

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

by courtesy of

www.handwerke.de (Computers in Crafts, February/March 2016 issue, page 6-7)

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About the author

Dr. Johannes Fiala
PhD, MBA, MM

Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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