In a surprising move, the consortium of German banks has announced that the insured amounts under its mutual deposit guarantee will be lowered from January 2015 on. German newspaper Die Welt broke the news and even though this doesn’t change the state guarantee on deposits on savings accounts, banks seem to be finally giving up the idea that their mutual guarantee scheme will be able to cover collapsing banks.
Source: Die Welt
The importance of this news shouldn’t be underestimated as the fund which has 165 members had to compensate bank clients in 30 cases since it was created, and according to industry experts, the bank fund was a very important reason why bank runs haven’t really occurred in Germany.
Until now, the banks’ mutual fund had to secure and guarantee at least 30% of the equity capital of the institutions, but this ratio will now be reduced to 20% in January 2015 and further reduced to 8.75% in 2025. This means that in for instance Deutsche Bank’s case which had an equity position of $70B, the mutual deposit guarantee scheme would no longer guarantee $21B, but just $6.1B from 2025 on and this is a serious reduction and actually undermines the credibility of the German banking system.
Although the state guarantee isn’t changed, it will definitely be impacted as it’s the banks who have to contribute to the guarantee of 100,000 EUR per customer. And if those banks reduce the guarantee of their mutual insurance, then you can be 100% sure it will be much more difficult (if not, impossible) to take care of a large default in the German financial system. It gets even worse, as the total contributed cash in the mutual guarantee scheme is just 5 billion Euros. This means that should a large bank like Commerzbank or Deutsche Bank run into difficulties, there’s just no way the smaller outfits in the banking landscape will ever be able to carry the weight on their shoulders without ending up in a dire situation as well.
This is just another piece adding onto a negative interest rate on savings accounts which was announced a short while ago. The German banking system is the first one to go the ‘unconventional’ route and in times where people are looking for more safety, the German banks are reducing their liabilities and accountability. The end game seems to be starting.
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