Draft Regulations transposing the EU Directive on Deposit Guarantee Schemes

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The MFSA, Malta’s competent authority pursuant to the Banking Act, is publishing draft regulations to implement Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes (“the recast DGSD”). Once approved, these regulations will replace the current regulations that are in place – Legal Notice 239 of 2003, the Depositor Compensation Scheme Regulations.

The recast DGSD was published in the Official Journal of the EU in June 2014. It introduces harmonized funding requirements (including risk-based levies), protection for certain types of temporary high balances, a reduction in pay-out deadlines, harmonization of eligibility categories (including an extension of scope to cover deposits by most companies regardless of size) and new disclosure requirements. The DGSD is a largely maximum harmonizing directive and therefore Member States’ policy discretion is limited, with the exception of areas that are mainly operational.

The draft regulations foresee a banking directive being drawn up in order to establish MFSA’s rules concerning the risk-based method and the compensation contribution method that will govern the contribution levied against banks. While the rules concerning compensation contribution and management expenses contribution methods are being published as part of MFSA’s consultation, rules concerning risk-based methods will be published in due course.

The following is a summary of the main proposals concerning the regulations.

  1. Membership: Credit institutions licensed under the Banking Act, with the exception of branches that are established in Malta by a credit institution that has its head office outside the EU, are required to participate in the scheme.
  2. Eligibility: Most corporate depositors will be protected under the scheme while only very few types of depositors will be ineligible for compensation.
  3. Coverage: Every deposit account will be covered by up to €100,000 (or the equivalent in any other currency). Coverage will be calculated on a “per depositor per bank” basis. In the event of a pay-out, compensation will be paid in Euro (€) and foreign currency deposits will be converted accordingly.
  4. Temporary High Balances (THBs): Certain types of deposits classified as THBs will receive temporary protection for deposits up to 6 months in excess of the €100,000 limit. These include proceeds from sale of private residential property and life events (such as sums received from a life policy and compensation claims). THB protection will be up to €500,000.
  5. Speed Of Pay-Out: This will be reduced from 20 working days to 7 working days (for most depositors) with full compliance by the end of 2023. Until then, the scheme would be required to pay depositors of a failed bank a specific amount upon request being made by a depositor. The scheme may defer payment for up to three months in particular instances.
  6. Disclosure: Banks will be required to inform depositors about the compensation arrangements. The new disclosure requirements include the use of a prescribed information sheet.
  7. Single Customer View (SCV): Deposit accounts will need to be marked in a manner that facilitates the processing by the scheme of timely pay-out. Banks will also be required to adhere to prescribed technical standards in relation to the manner such information is maintained and processed by the scheme.
  8. Funding: The scheme will be funded by ex-ante contributions payable by participating banks and such funds may not be used for any other purpose except for the payment of compensation to depositors in the event of a default. Each bank will be risk-assessed and required to pay annual contributions in accordance with its risk assessment. Over a time period the scheme will be obliged to build a minimum target fund of 1.3% of the banks’ covered deposits. Part of the scheme’s funds may be limitedly held in low-risk assets by the banks as collateral in favor of the scheme.

The MFSA will also be issuing banking rules to supplement parts of the regulations. It is currently preparing draft rules on the criteria which will be used to assess risk-based contributions. The rules will be based on the European Banking Authority’s guidelines.

Interested stakeholders, such as banks operating in Malta and on a cross-border basis, as well as depositors, are being invited to submit their comments on the draft regulations by not later than September 30th, 2015.