The European Deposit Guarantee Directive: An Appraisal of the Reforms

Abstract

The international financial crisis of 2007 and 2008 exposed some crucial deficiencies in the European deposit protection arrangements as set out in the 1994 Directive. The recent financial turmoil once again highlighted the importance of deposit protection to contribute to financial stability and reduce the risk of depositor panic as banks experience problems. The crisis concomitantly exposed the cross-border risks in the EU’s integrated financial marketplace.This chapter explores the rationale behind deposit protection to safeguard financial stability and protect depositors. It will review the introduction of deposit protection in the EU and particularly explore the limits of its ‘model’ in light of the wider literature on deposit protection. The reform to the 1994 Directive was introduced in March 2009. 1 The principal conclusion is while the 2009 reforms have abolished co-insurance, increased the coverage level and reduced the delay in reimbursements, they have not dealt with some of the underlying issues that underpin the efficiency with which these reforms can ultimately be satisfied, namely how the Member states will formally fund their deposit protection schemes to meet any proposed payout. Moreover, the lack of consideration of this means Member states will still need to intervene in future crises to bridge the gap.