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1. What does the bank deposit guarantee offer?
The system currently in force in Belgium results from a European directive from 2014. Every deposit, whether a current account, a time account or a savings account, is protected up to an amount of 100,000 euros per person and per credit institution. The owner of this account must be a natural or legal person, including SMEs under certain conditions.
It is the national guarantee fund that intervenes if a branch in the country goes bankrupt. This means that the customer of a Belgian branch of a foreign bank (e.g. Deutsche Bank Belgium) is dependent on the German guarantee fund.
After the 2008 financial crisis, the guarantee limit was increased from 20,000 to 100,000 euros throughout the European Economic Area. The aim was to avoid bank runs when difficulties arose, such as Northern Rock.
Banks like Fortis and Dexia also experienced deposit withdrawals when they hit turmoil during the subprime crisis. It took nationalization by the Belgian state to appease savers.
The ECB doesn’t touch its interest rates
2. How does the guarantee fund work?
The terms and conditions of the Guarantee Fund in Belgium were changed by a law of November 23, 2023. This fund is financed by credit institutions. New and important point: The legislature has set a contribution cap of 1.8% of eligible contributions until 2025. Eligible deposits amounted to 343 billion euros (of which around 300 billion in savings accounts) at the end of 2022 (last available figure).
The fund currently amounts to almost 6.9 billion euros. This corresponds to between 1.4% and 1.5% of permitted deposits. “In the Netherlands and Germany this percentage is 0.8% (which corresponds to the European standard), in Luxembourg it is 1.6% and in France it is 0.5%. Since then, contributions in Belgium have been (much) higher than elsewhere,” we remember at Febelfin. the Belgian Association of the Financial Sector.
Since the guarantee was increased to 100,000 euros almost 15 years ago, it has only been activated once in Belgium. It happened in 2015 as part of the bankruptcy of the small Optima Bank. “All depositors received their money back and things went very well,” explains Alexandre De Geest, general manager of the Ministry of Finance. The amounts used were around 50-55 million euros.
3. What are the advantages and disadvantages?
When this system, called DGS (Deposit Guarantee Schemes), was introduced, “the aim was to ensure trust in the banking system. The goal was clearly achieved,” believes Alexandre De Geest.
“The great advantage of this guarantee is that it aims to reduce the risk of bank panics,” emphasizes Eric Dor, director of economic studies at the IESEG School of Management (Paris and Lille). But he also sees possible disadvantages. “Banks could rely on this offered guarantee to take excessive risks. The probability of a bank failing would increase. “This would then also increase the risk of having to compensate the deposits,” continued Eric Dor. “To counteract this, the supervisory authorities are tightening their controls as well as capital and prudence requirements when granting loans or other financial positions.”
Why are Belgian savers so reluctant to change banks?
Another advantage of the guarantee, mentioned in a 2010 study by the National Bank, is the promotion of competition. “Private individuals can choose their bank without (great) consideration of the risk of default. This reduces the information burden on the customer so that he can easily search for the institution that offers the highest interest rates.”
This type of argument applies to an institution like MeDirect, whose parent company is based in Malta. Would the Belgian subsidiary, whose name was completely unknown until recently, manage to attract customers without a guarantee? We doubt it. However, this advantage has its limits due to the saver’s inertia.
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If a large systemically important bank were to be wound up, it could happen that even deleting stocks, bonds and parts of deposits over 100,000 euros would not be enough to find a healthy situation among private or public investors who would recapitalize them.
4. What would happen if a systemically important bank failed?
To be clear: it is not the 7.8 billion from the Belgian guarantee fund that would make it possible to compensate all depositors of one of the country’s largest banks should it go bankrupt, and the state would therefore have to directly do the missing ones Fund amounts. “No matter which EU country it is, the available financial resources of the guarantee funds would not be sufficient to compensate the holders of the guaranteed deposits of a large systemically important bank,” confirms Eric Dor.
In the event that a larger institution finds itself in difficulties, European legislators have provided for a resolution system. “If a large systemically important bank were in liquidation, it could happen that even deleting stocks, bonds and parts of deposits over 100,000 euros would still not be enough to find a healthy situation among private or public investors who would recapitalize them adds Eric Dor.
In this case, deposits of less than 100,000 euros would be lost in whole or in part, but depositors would be compensated thanks to the guarantee system. The state would be forced to first borrow the money itself in order to lend it to the deposit insurance system. Given the amounts involved, a country like Belgium might prefer the preventative measure of nationalization, as was the case with Fortis and Dexia.
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