Should a bank be unable to repay funds held by customers with it, i.e. deposits, customers’ claims for repayment are secured to a certain extent by deposit guarantee schemes. In the event of such a bank failure, these schemes repay the protected deposits to customers and recover the amounts in question through recourse to the failed bank. The German financial industry offers its customers a level of protection for their deposits that is unparalleled globally.
Both private and public banks have statutory compensation schemes that are recognised as statutory deposit guarantee schemes within the meaning of the German Deposit Guarantee Act (EinSiG). These protect customer deposits up to the level prescribed by law.
The statutory compensation schemes are supplemented by voluntary, contractual deposit guarantee schemes that are not recognised as deposit guarantee schemes within the meaning of the German Deposit Guarantee Act. These are the Deposit Protection Fund of the Association of German Banks (set up in 1976) and the Deposit Protection Fund of the Association of German Public Banks (set up in 1994). The voluntary deposit guarantee schemes provide deposit protection going well beyond the statutory level of protection. The statutory and voluntary deposit guarantee schemes together form an integrated system that ensures the safety and stability of the financial sector.
The savings banks (Sparkassen), Landesbanken and Landesbausparkassen operate an institutional protection scheme that is recognised as a statutory deposit guarantee scheme under the German Deposit Guarantee Act. The local cooperative banks (Volksbanken and Raiffeisenbanken) set up a compensation scheme complying with the statutory requirements under the German Deposit Guarantee Act – the BVR ISG – as their institutional protection scheme. The BVR ISG is recognised as a statutory deposit guarantee scheme. The job of both schemes is to protect their member banks against failure and liquidation.
This effectively means that the savings banks and public banks on the one hand and the cooperative banks on the other are each jointly liable if any of their members becomes financially distressed (so-called institutional protection). In such a case, different guarantee funds intervene, provide financial support and in this way prevent the bank’s imminent failure. Customers of banks that are affiliated to an institutional protection scheme are therefore indirectly protected against losing their deposits.