Guarantee funds in Germany
(By Verbraucher - Zentrale Hamburg e.V.)

Guarantee funds in financial services: The defense of the con-sumers before the banks, insurances and services of investment insolvency situations

It has been a long tradition that private German households use a big part of their savings to acquire financial assets with banks, insurance corporations and in securi-ties. In 2003 German private households had an amount of 167,4 billion € for saving. The private savings ratio rose to 10.8 % in 2003, i.e. Germany was somewhat above the euro- aria average. In 2003 households used the biggest part of investable funds, i.e. €141.4 billion, to acquire financial assets. Therefore protection of private household deposits and investments with banks, insurance companies and in securi-ties is of big interest not only for the consumers but also for the banks.

Within acquisitions of financial assets deposits and savings certificates with banks took the biggest part, i.e. € 58.3 billion (41,2%), followed by acquisitions in securi-ties with € 37.5 billion (26.5%) and financial assets with insurance corporations with € 32.0 billion (22,6%). In 2003 German private households had a total of € 3,922 billion (100%) saved in financial assets; thereof € 1,399 billion with banks, € 1,306 billion in securities and € 997 billion with insurance corporations.
On the average every single one of the 38.944 billion private households in Germany had an amount of € 35,000.00 savings at banks, € 33,000.00 in securities and € 25,000.00 with insurance corporations.
Incorporation European Normative to the National Legislation
It is not easy to understand the German discussion about the incorporation of Euro-pean Normative to the German Legislation without considering the historical back-ground:
There are already different voluntary deposit protection schemes, some of them al-ready established in the early 1930-ies, operated by various categories of German banks. Compared to the EC Deposit Guarantee Directive provisions those protection schemes deliver partly much higher protection for the depositors.
Translation of the EC Deposit Guarantee and Investor Compensation Di-rectives into the German Deposit Guarantee and Investor Compensation Act 1998 (Einlagensicherungs- und Anlegerentschädigungsgesetz 1998, „ESAEG 1998“)
Owing to positive experience of the system of private deposit protection in Germany,
the legislative did not intend to create additional, compulsory deposit protection schemes. That is the reason why the EC Deposit Guarantee and Investor Compensa-tion Directives were translated into German Deposit Guarantee and Investor Com-pensation Act 1998 (Einlagensicherungs- und Anlegerentschädigungsgesetz 1998, „ESAEG 1998“) not until August 1, 1998.

The delayed implementation of the EC Deposit Directive in Germany (the Directive for harmonizing the deposit guarantee schemes in the EU member states provided for its translation into national law by July 1, 1995) was due to an action filed by the Federal Republic of Germany against the Deposit Guarantee Directive at the Euro-pean Court of Justice. A petition was made to declare the directive void. As explana-tion the federal republic pointed out, the existing private deposit protection schemes had shown their ability to cope with crisis and would be superior compared to the immobile instruments of compulsory deposit protection schemes.
As an alternative the action was directed against the EC directive's provisions on credit institutions from countries with a higher level of cover that was permitted to guarantee only the level of cover of the host country for their foreign establishments (“export ban”) and on “topping-up”, i.e. provisions on Deposit protection schemes with a higher level of cover having to admit the branches of foreign credit institutions in order to guarantee them the same scope of cover in the host country as that of the institutions based there.
The action was rejected by the European Court of Justice in May 13, 1997. After a short period of time both directives were implemented together into the ESAEG 1998.

Provisions of the ESAEG 1998
The ESAEG 1998 provides for the establishment of different types of compensation schemes following the three categories of institutions in Germany. The act differenti-ates between private deposit taking institutions, public deposit taking credit institu-tions and “other institutions”. Corresponding to the EC Deposit Guarantee and In-vestor Compensation Directives no provisions are made for life insurance corpora-tions.
As an explanation a few words on the banking- and insurance system in Germany:
There are more then 2,500 credit institutions registered in Germany. Private deposit credit institutions include German private Commercial Banks, Members of the Asso-ciation of German Banks (“Bundesverband Deutscher Banken”, BdB), German Peo-ple’s Banks and Raiffeisen Banks (co-operative bank group) , organized in the Fed-eral Association of German People's Banks and Raiffeisen Banks (“Bundesverband der Deutschen Volks- und Raiffeisenbanken”, BVR) and Private Building and Loan Asso-ciations.
Public deposit credit institutions, including German Savings Banks and Regional Sav-ings Banks, are mostly run by the local authorities associations and appear members of the German Savings Bank and Giro Association (“Deutscher Sparkassen- und Gi-roverband”, DSGV). Other public deposit credit institutions are members of the Asso-ciation of German Public Banks (“Bundesverband Öffentlicher Banken Deutschlands”, VÖB). Finally, some public Building and Loan Associations appear subject to public law.
Furthermore there are so called other institutions, including those institutions which are not deposit-taking credit institutions, i.e. institutions which conduct investment and contract broking, portfolio management or own-account trading or principal broking or underwriting business, such as securities trading banks, financial services institutions and investment companies.
Finally, German Life Insurance Corporations are organized in the German Insurance Association (“Gesamtverband der Deutschen Versicherungswirtschaft e.V.”, GDV).

Under the ESAEG 1998, all deposit-taking credit institutions under private and public law as well as all securities trading firms are obliged to cover their deposits and li-abilities arising from investment business through membership in a statutory com-pensation scheme.
Under § 6 ESAEG the statutory compensation schemes are set up in principle at the Reconstruction Loan Corporation (Kreditanstalt für Wiederaufbau), a specialized bank of the Federal Government.
However, the functions and powers of a compensation scheme may be assigned to a private-law entity, § 7 ESAEG 1998.
In conformity with the Deposit Guarantee Directive, the ESAEG 1998 exempts mem-bers of schemes safeguarding the viability of institutions from compulsory member-ship in a statutory compensation scheme, if, by virtue of their by-laws, the schemes protect the member credit institutions themselves, i.e. prevent impending insolvency through restructuring. In Germany the guarantee schemes of the DSGV (German Savings Bank and Giro Association) and the guarantee schemes of the BVR (Federal Association of German People's Banks and Raiffeisen Banks), protect the institutions by virtue of their by-laws, and are therefore deemed to be systems which can sub-stitute for compulsory membership in the statutory compensation scheme under the terms of the directive.
The scope of protection under the ESAEG 1998 covers funds and money market in-struments. Claims arising from bearer or order bonds do not fall within the definition of protected deposits. On the other hand, account balances and claims arising from registered debt securities are deemed to be protected deposits. Furthermore, no right to compensation exists if deposits or funds are not denominated in the currency of a country in the European Economic Area or in Euro.
According to § 4 II ESAEG 1998, for both protected deposits and claims arising from investment business, the amount of the claim to compensation is limited to 90% of the non-fulfilled claims and the equivalent of € 20,000 for each creditor.
The legislative intention when implementing the Deposit Guarantee Directive was geared to maintaining the voluntary system of deposit protection even after the ESAEG 1998 had entered into force, i. e. to save the partly higher level of protection offered by the existing voluntary protection schemes. The already-established vol-untary compensation schemes by the various categories of banks now coexist with the compulsory deposit protection schemes.
Thus, a differentiated multi-level Deposit Guarantee and Investor Compensation system exists in Germany. Depending on the different categories of banks the private deposit protection system in Germany is variously organized.
Deposit protection of private commercial banks
Voluntary protection
While some regional deposit insurance schemes had existed since the 1950s, it was not until the Herstatt crisis of 1974 that the private banks deposit insurance scheme in Germany was set up. Since the early 1960s political pressure to introduce a de-posit insurance scheme for all financial institutions increased. After the Herstatt cri-sis, finally, the three banking groups introduced their respective schemes to avoid government intervention that might have gone beyond the introduction of a general deposit insurance scheme.
The Deposit Protection Fund of the BdB (Association of German Banks) secures all liabilities of banks to non banks, e.g. private persons, business enterprises and public agencies. The deposits protected are for the main part demand, term and savings deposits and registered savings certificates. On the other hand, liabilities in respect of which a bank has issued bonds payable for the bearer are not protected.
About 280 private commercial banks associate with the Deposit Protection Fund of the BdB. Moreover, some German establishments of foreign banks are members of the fund.
The deposits of every customer at the private commercial banks are secured up to a ceiling of 30 % of the relevant liable capital of each bank, up to this amount without limitations. In other words this deposit protection means virtually full protection for all deposits at the private commercial banks, even at small banks. In case of a small bank with a capital of € 5 million, amounts up to € 1.5 million per depositor are se-cured in case of a insolvency situation. The deposit protection fund of the BdB only covers deposits and depositors if and to the extent that these are not already cov-ered by the compulsory protection scheme. But although there is nearly complete coverage, there is no statutory right, neither for depositors to be reimbursed, nor for the banks to be helped in the case of a crisis. While no bank has been refused help and no depositor has been refused reimbursement, this seems to leave a degree of uncertainty in the system.
Compulsory protection of deposits and investments
The statutory deposit protection scheme is assigned by the Reconstruction loan as-sociation to the Compensation Scheme of German Banks (“Entschädigungseinrich-tung deutscher Banken GmbH”, EdB). The Compensation Scheme of German Banks is a private law entity, set up in 1998. The EdB performs the tasks of the compensa-tion scheme called for under the ESAEG 1998 for the area of the private commercial banks and the private building and loan associations. The EdB provides protection according to the ESAEG 1998, i.e. it secures up to 90% of deposits and the equiva-lent of € 20,000 per depositor.
Deposit protection of German co-operative banks
Institutional guarantee
The co- operative bank group has several regional deposit insurance schemes and a national compensation scheme. Those schemes do not directly guarantee deposits, but rather the institutions themselves. In case of insolvency situations these schemes shall prevent impending insolvency through reconstruction and yet safeguarded the viability of their members in the past. In other words the deposits of every customer at the cooperative banks in Germany are secured without limitation.
Compulsory protection of deposits and investments
Under the ESAEG 1998 German cooperative banks are exempted from compulsory membership in a statutory compensation scheme due to the institution-protection by the voluntary protection schemes.
Deposit protection of German Savings Banks and Regional Savings Banks
Institutional guarantee
There are 11 regional savings bank support funds, the Landesbanken‘s deposit guar-antee reserve and the Building and Loan Associations deposit protection which cush-iouns institutions that fall into difficulties. Moreover, the various funds are linked in a joint liability scheme with a total of € 4.0 billions. In case of a financial crises, the funds will support the savings banks, regional banks and Building and Loan Associa-tions and protect them from going under. Since the 1970s there has been about 25 cases of support, three of them managed by the joint liability scheme.
In other words deposits and securities with the German savings and regional savings banks are protected without limitations.
Maintenance obligation and guarantee obligation
As a specialty in the German public banking sector, German public banks have been protected by an explicit institutional guarantee of the public owners, i.e. through maintenance obligation (“Anstaltslast”) and guarantee obligation (“guarantee obliga-tion”) so far.
“Anstaltslast” is the obligation of the owners to keep a public bank in a position to perform its functions and to enable it to perform its obligations when due. “Gewähr-trägerhaftung” is the unlimited, joint and several guarantee of the owners for all the public sector bank's obligations. If claims of creditors have not been paid by the pub-lic bank, the Guarantee Obligation gives a direct claim against one or all owners.
After a complaint from the European Banking Federation at the end of 1999 con-cerning the state guarantees for public sector financial institutions in Germany, the EU Commission was of the opinion that these guarantees were not in accordance with European competition law. Due to this complaint a plan for adaptation of the guarantees was agreed between the EC Commission and the Federal Republic of Germany. The main elements of this Agreement were the following: “Gewährträger-haftung” will be abolished. “Anstaltslast” will be modified so that it shall not differ from a normal commercial owner relationship governed by market economy princi-ples.
Thereof “Anstaltslast” and “Gewährträgerhaftung” shall remain in their current form during a transitional period running to the 18th of July 2005.
Due to the raised scope of the protection funds it is not likely that these changes will effect the level of security of deposits and securities with public banks.
Compulsory protection of deposits and investments
Like the co- operative banks the German savings banks, the regional banks and the public building- and loan associations are exempted from compulsory membership in a statutory compensation scheme due to the institution-protection by the voluntary protection schemes.
Deposit protection of other German public sector banks
Voluntary protection
In 1994 the other German public sector banks founded the Security funds of the As-sociation of German Public Banks (“Einlagensicherungsfond des VÖB”). The scope of deposit protection is very similar to the scope of protection the deposit protection fund of the Association of German private banks offers, meaning full protection for the main part demand, term and savings deposits, registered savings certificates and securities. Liabilities in respect of which a bank has issued bonds payable for the bearer are not protected.
Like the deposit protection fund of the BdB, the security funds of the VÖB only cov-ers deposits and depositors if and to the extent that these are not already covered by the compulsory protection scheme.
Compulsory protection of deposits and investments
The statutory deposit protection scheme is assigned by the Reconstruction loan as-sociation to the Compensation Scheme of the Association of German public banks (“Entschädigungseinrichtung des Bundesverbandes Öffentlicher Banken Deutschlands GmbH”). The Compensation Scheme of the Association of German public banks is a private law entity and performs the tasks of the compensation scheme called for un-der the ESAEG 1998 for the area of the other German banks of the public sector, securing up to 90% of deposits and the equivalent of € 20,000 per depositor.
Investor compensation at securities trading banks, financial services in-stitutions and investment companies
Unlike other institutions German securities trading banks, financial services institu-tions and investment companies have not set up a voluntary protection scheme yet.
Under the ESAEG 1998 the compensatory fund for securities trading companies (“Entschädigungseinrichtung der Wertpapierhandelsunternehmen”, EdW) was set up at the Reconstruction Loan Corporation. About 760 “other institutions”, i.e. German securities trading banks, financial services institutions and investment companies that must belong to a guarantee scheme under the terms of the ESAEG 1998 are as-signed to the compensation scheme at the Reconstruction Loan Corporation.
Claims for the transfer of ownership of securities or the disbursement of funds in connection with investment business, such as proceeds from the sale of securities, are deemed to be protected claims arising from investment business. In the case of deposit-taking credit institutions, claims for the disbursement of funds in connection with investment business are deemed to be deposits; with such institutions, the legal claim to compensation arising from investment business therefore covers solely the claim to surrender the securities.
Deposit protection of German life insurance companies
Voluntary protection
As a voluntary protection German life insurance companies founded the rescue com-pany Protektor AG in 2002. Its shareholders are German life assurers – a total of 103 companies. Protektor AG was set up as a private sector entity by the German Insur-ance Association (“Gesamtverband der deutschen Versicherungswirtschaft e.V.”, GdV), facing the first insolvency of a German life insurer in 50 years. One of the old-est German life insurance companies, the Mannheimer Lebensversicherung AG, had been struggling to stay afloat following significant losses on the capital markets in 2001.
Protektor Lebensversicherungs-AG protects insured clients against the consequences of any insolvency by a life assuror. It takes over the contract portfolios of an ailing company, managing and consolidating them in order to subsequently dispose of them. With a capital stock of just €3.2 million put forth by 10 insurers, Protektors rescue funds remained rather limited in the beginning. The shareholders undertake to provide Protektor with supplementary capital resources up to 1 per cent of ordi-nary investments according to the balance sheet. This means that Protektor has ac-cess to a capital stock of around € 5 billion.
Compulsory protection of deposits and investments
The German Government presented an amendment of the German insurance super-vision act in April 2004. According to the amendment, a compulsory protection fund shall be set up for the German insurance sector. In case of an insolvency situation, the protection fund shall take over the contract portfolios of the ailing company, managing and consolidating them in order to subsequently dispose of them.
The existing Protektor AG shall be assigned to execute the provisions of the insur-ance supervision act.
Main problems for the consumers
The existing differentiated multi-level Deposit and Investor insurance system in Ger-many seems to have worked well over the last 30 years. It offers nearly full security for the customers of the three main German bank groups. However, there still remains cause for criticism, particularly with regard to the phase when consumers decide where to invest money and when they choose among the different credit institutions. It is true that the deposit protection fund of the association of German private banks rates its members annually according to the risk of their assessment bases and that private banks shall pay risk- adjusted contributions. It is also true, that the regional savings banks support funds and the regional deposit insurance schemes of the co- operative banks rate their member institutions regularly. How-ever, the funds do not make this information available to the public. Therefore consumers are not able to monitor the banks in order to make decisions according to the risk.
Furthermore, the deposit protection fund of the association of German private banks does not constitute a statutory right to claim compensation.
Problems might also appear if German consumers invest abroad. One has to differentiate between branches of German credit institutions, German subsidiary companies and foreign banks. Foreign branches of German credit institutions guarantee the same level of protection like German domestic institutions, i.e. the by- laws of the voluntary German deposit protection schemes also call for the protection of customers of branches which institutions have established in other member states. The Provisions for institutions from member states with a higher level of cover for their branches abroad granting only the level of cover of the host country (export ban) expired December 31, 1999.
On the other hand foreign subsidiary companies of German credit institutions are not eligible for membership in voluntary German deposit protection schemes. For those institutions sole responsibility lies with the deposit protection system of the home country. From a German point of view there remains a security hole compared to the higher level of cover German institutions offer.
Regarding protection of deposits with insurance companies it remains to be seen what the amendment of the German insurance supervision act will bring. In 2003 consumers reported some uncertainties caused by the insolvency of the Mannheimer Lebensversicherungs AG. Meanwhile the Federal Supervisory Institution for Financial Services (Bundesanstalt für Finanzdienstleistungsaufsicht) approved the contract on transfer of portfolio concluded between Protektor Lebensversicherungs-AG and Mannheimer Lebensversicherung AG.
Proposel of Modification of the European Norm
As already mentioned above consumers should have the opportunity to monitor banks in order to make decisions according to the riskiness of the bank’s business.
Therefore the compulsory protection schemes should be obliged to publish informa-tion regarding the risk and consumers should be given a statutory right to claim in-formation. As the German voluntary protection schemes already rate their members, this should not cause serious problems.
The voluntary deposit protection fund of the association of German private banks might be a model to be considered for future amendments of the European Norm. The scope of protection should be increased up to the level the deposit protection fund offers. Consumers should be protected without limitations if their bank fails. This would negotiate the remaining lack of security for German depositors investing abroad.
The proposed higher level of protection should not make high financial demands on the protection schemes, as the protection fund of the association of German banks exemplifies. The scheme for the private banks is financed exclusively by the member banks and on a mixed ex-ante and ex-post basis. Member banks have to pay a premium of 0.03% of “liabilities to other creditors arising from banking business” every year. Banks that are classified as higher risks, are required to pay an additional premium of up to 250% of the regular premium.
Therefore the compulsory protection schemes should provide an unlimited scope of protection. A guarantee threshold, which may result in the loss even of parts of small deposit balances would run counter to the systemstabilising protection of depositor confidence. However, the guarantee retention should only remain if consumers will be entitled to monitor banks.
The system of deposit protection contrary to the system of an institutional guarantee should be retained unchanged. Otherwise the market discipline exercised by the banks could decrease, preventing unprofitable institutions from going under, causing socialization of losses which are due to individual responsibility.
In regard to the protection of savings in the life insurance sector a European provi-sion is due. The provisions given in the above mentioned amendment of the German insurance supervision act could be a model.