The Protection Of Depositors In The Event Of A Bank Failure

The European legislator has always been aware of the crucial importance of financial stability and of maintaining a high level of confidence in the financial markets. In order to achieve these objectives, a number of directives have been adopted in the past 40 years aimed at preventing financial risks through the establishment of supervisory institutions and the gradual strengthening of their powers. However, it has proved not to be sufficient: bank failures still do happen, causing serious negative consequences not only on depositors' personal level – they become unable to recover their savings – but also on a general level, since the solidity of the financial sector will appear undermined. With a view to limit such risks, deposit-guarantee schemes have been created and are being constantly improved.

Directive 94/19/EC on deposit-guarantee schemes

In 1994, the European Parliament and Council adopted the Directive 94/19/EC on deposit-guarantee schemes, with a view to enhancing the depositor's protection. The directive required that Member States ensure the creation of deposit-guarantee schemes (Article 1) and imposed on supervisory authorities a series of duties such as verifying that the banks adhering to the scheme comply with their obligations, adopting prudential measures for ensuring such compliance and, in the most serious cases, revoking the authorisation to exercise banking activity (article 3). The Directive fixed at €20,000 the limit to the sums which can be claimed by depositors from insolvent banks adhering to such scheme (Article 7).

At least one deposit-guarantee scheme has been created by each Member State. In Malta, Directive 94/19/EC was implemented by Legal Notice 369 of 2003, under which the "Depositor Compensation Scheme" was established. Such scheme is defined as "a rescue fund for depositors of failed banks which are licensed by the Malta Financial Services Authority (MFSA)". Such scheme shall "pay compensation if a bank is unable to meet its obligations towards depositors or has otherwise suspended payment"1.. The Scheme covers deposits made with all credit institutions incorporated and licensed in Malta, including their branches operating in another EEA State, and, in some cases, those made with branches of credit institutions operating in Malta but licensed in another EEA state or in a non-EEA state. The updated list of the banks participating in the Depositor Compensation Scheme can be found here.

Unfortunately, Directive 94/19/EC "has proved not to be adequate for a large number of deposits in the Community"2: the amount recoverable by depositors through the deposit-guarantee schemes was often insufficient and some unsatisfied depositors have followed suit against the financial supervisory authority of their country, seeking compensation for their losses, which – they argued – were caused by the authority's defective supervision over the insolvent bank. Here below, we will examine some relevant cases, starting from the European Court of Justice's decision Peter Paul and others v. Bundesrepublik Deutschland3.

ECJ, Peter Paul and others v. Germany

The issue of financial supervisory authorities' liability vis-à-vis depositors has been dealt with by the European Court of Justice in the Peter Paul and others v. Bundesrepublik Deutschland case.

In 1987, the BVH Bank received authorisation to engage in banking transactions from the Bundesaufsichtsamt für das Kreditwesen (Federal office for the supervision of credit institutions, i.e. the German financial supervisory authority), but was not a member of a deposit-guarantee scheme. From 1987 to 1992, the bank has applied unsuccessfully for admission to a deposit-guarantee scheme, but it was refused because some of the required conditions were not fulfilled.

During the 1990s the bank has experienced financial problems. Over those years, the supervisory authority has made several examinations of the bank's affairs and eventually filed a bankruptcy petition and revoked the bank's authorisation to engage in banking transactions in 1997.

Following this event, the claimants, who had opened term deposit accounts with the BVH Bank between 1993 and 1995, were not able to recover the sums deposited on their accounts.

Therefore, they brought proceedings against the Federal Republic of Germany seeking compensation for the losses of their deposit, arguing that:

if the State had transposed directive 94/19/EC in a timely manner, a deposit-guarantee scheme would have existed by 1997 from which each claimant would have been able to recover a sum of up to €20,000, and they would not have suffered any loss if the supervisory authority had correctly supervised the bank's activity. Therefore, the State should be held liable under § 839(1) BGB4 and art. 34 GG for "negligent breach of official duty" committed by an official (the financial supervisory authority), where the "official duty" consisted in the obligations – imposed on Member States by art. 3 of the Directive – to monitor the fulfilment by the banks of the conditions required for their authorisation to engage in financial transactions, to take the necessary measures in case of non-fulfilment and, in the last instance, to revoke the authorisation. For these reasons, they claimed that the State should be condemned to pay to each depositor:

the equivalent of the sum which they had deposited and that cannot be recovered from the bank, up to the limit of €20,000, as a compensation for the belated...