In its recent Judgment of 28 January 2013 in Case E-16/11 EFTA Surveillance Authority and Commission v Iceland (Icesave Judgment), the EFTA Court has given an interpretation to Directive 94/19/EC on deposit-guarantee schemes (even as amended by Directive 2009/14/EC) that significantly reduces the potential effectiveness of EU/EEA/EFTA banking and security deposit-guarantee schemes. This is worrying.
According to the EFTA Court,
135 [...] pursuant to Article 3 of the Directive, EEA States have to introduce and officially recognise a deposit-guarantee scheme. Moreover, they have to fulfil certain supervisory tasks in order to ensure the proper functioning of the deposit-guarantee scheme. However, it is not envisaged in that provision that EEA States have to ensure the payment of aggregate deposits in all circumstances.139 It appears that under the new version of the provision EEA States are obliged to ensure a certain level of coverage. Whether this obligation is limited to a banking crisis of a certain size would require further assessment. However, that question can be left open here since […] Directive 2009/14 is not applicable in the present case.140 At any rate, the rewording of Article 7 of the Directive shows that the European legislature considered substantial change necessary to extend the responsibility of the EEA States beyond the establishment of an effective framework.141 This supports the view that the obligation on the EEA States under the version of the provision applicable in the case at hand is limited to ensuring that national rules which require a coverage level of at least EUR 20 000 are maintained or adopted.144 […] it must be held that Article 7 of the Directive does not lay down an obligation on the State and its authorities to ensure compensation if a deposit-guarantee scheme is unable to cope with its obligations in the event of a systemic crisis.148 […] an obligation on the State and its national authorities to ensure compensation if a deposit-guarantee scheme is unable to cope with its obligations under exceptional circumstances such as in a systemic crisis cannot be derived from that provision [Article 10 of the Directive].172 […] recital 24 in the preamble to the Directive states that liability of a State and its competent authorities in respect of depositors is precluded “if they have ensured that one or more schemes guaranteeing deposits or credit institutions themselves and ensuring the compensation or protection of depositors under the conditions prescribed in this Directive have been introduced and officially recognized.”176 […] the reservation set out in recital 24 in the preamble to the Directive aims expressly to preclude an excessive shifting to the State of the costs arising from a major banking failure.178 In view of the above, the Court holds that the Directive does not envisage that the defendant itself must ensure payments to depositors in the Icesave branches in the Netherlands and the United Kingdom, in accordance with Articles 7 and 10 of the Directive, in a systemic crisis of the magnitude experienced in Iceland. (E-16/11 at paras 135 to 178, emphasis added).
In my view, this jeopardises the effectiveness of deposit-guarantee schemes (DGS) by allowing Member States and their supervision entities to shield behind formalities linked to the design of such DGS and to reject any liability potentially derived from their errors of assessment or insufficient solvency requirements in case of a systemic crisis. The issue of State liability is discussed in such formalistic terms that the Icesave Judgment seems completely disconnected from the general supervisory trends required in an area where risk assessment and risk-avoidance / risk-mitigation policies impose a much more sophisticated exercise to all other players (namely, the banks and the DGSs themselves).
The simplicity of the analysis, which omits any appraisal of the proportionality of the regulatory measures carried out by the State (both in terms of their suitability and their sufficiency), sets a bad precedent in an area where the incentive to set per-se rules in discharge of State liabilities seem already excessive.
Moreover, regardless of the attempt to restrict these findings to the 'pre-2009' version of the Directive, the extremely broad wording of paragraphs 144, 172 and 176 of the Icesave Judgment indicate otherwise. Particularly in view of the fact that at paragraph 139 the EFTA Court hints at the inapplicability of the 'post-2009' version to 'a banking crisis of a certain size[, which] would require further assessment'--and, indeed, this seems to be the most plausible (future) interpretation, unless a significant reversal of the Icesave Judgment is intended.
In this day and age, it looks implausible to have (significant) non-systemic banking crises (which, at any rate, would not be a significant problem if the existing mechanisms are properly in place and States keep any type of financial muscle). And, after the Icesave Judgment, I think that the most optimistic assessment is that, in cases of (ever more likely) systemic crises, the current 'guarantees' are perfectly useless and leave savers and investors unprotected and on their own. And this does not seem to be the best way to trigger investor confidence and to support the reconstruction of the banking industry.
Credit: alexhughescartoons.co.uk
Coupled with the recent reduction of capital requirements derived from the delayed start of Basel III, this 'new configuration' of DGS' as absolute safeguards of Member States' liability (limited, seemingly, to setting them up even if improperly or insufficiently), seems a worrying sign that the banking industry and, what is worse, its supervision is back to business as usual. I think I will start looking for a way to burn my limited savings before somebody else does it for me.