European Union framework
The area of the financial markets, including ensuring their stability, is subject to regulation by EU legislation. Given that financial markets are interconnected, “European” recommendations concerning deposit insurance were enacted as early as in 1986. In 1994, the first directive defining rules of deposit insurance was adopted and has since been subsequently updated.
The financial crisis that started in 2008 was a breakthrough. Many financial institutions worldwide got into critical situations that would have led to the collapse of the financial sectors of a series of countries without state intervention. State intervention was necessary in 22 of the 28 countries in the EU, while only smaller countries with more closed financial markets (including the Czech Republic) did not need state aid.
According to the European Commission Report, the financial crisis from 2008 to 2014 demanded the approval of state intervention in the form of guarantees, capital injections and temporary liquidity support totalling EUR 5.762 trillion (approx. CZK 155.574 trillion). This amount was the equivalent of 44% of EU GDP in 2013. Even though the amount was not completely used, it demonstrated the need for mechanisms at EU level that would take into account the interconnection of European financial markets and enable the resolution of problems of financial institutions in a timely manner and without the need to use public money from taxpayers.
This was implemented primarily through European Directive 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms, and Directive 2014/49/EU on deposit guarantee schemes. Further information, including links to texts of these directives, can be found on the page Legislation.
The new European legislative framework that all EU Member States have to implement into their legislation defines completely new rules, procedures and mechanisms, and enables cooperation between institutions not only at national but also at European level.
The European Banking Authority (EBA) now has a key role in this matter as Directive 2014/59/EU empowered it to issue many binding technical standards, guidelines and reports with the aim of establishing efficient and consistent procedures for prevention and crisis resolution in the financial sector within the EU. The most important goal in establishing this framework is to strengthen financial stability, reduce moral hazard, protect depositors and, in the event of a crisis, ensure the continuity of basic processes crucial for the uninterrupted functioning of the financial system, save public budget expenditure, and ensure the smooth functioning of the internal market for the provision of financial services. These activities are accompanied by continuous evaluation of the impacts brought by the directive on deposit guarantee schemes that also empowers the EBA to perform many regulatory activities.
The new legislation has also determined procedures for cross-border payouts of deposit compensation. In the event of the bankruptcy of a foreign bank based in an EU Member State and operating in the Czech Republic through a branch, the payout to the entitled persons will be made by the Guarantee System in the Czech Republic. The payout will be made in the name, at the expense and in accordance with the instructions of the relevant foreign deposit insurance scheme where the institution in question was insured. The procedure will be the same in the event of the bankruptcy of a Czech bank operating in another European Union Member State through a branch. In such a case the domestic deposit insurance scheme will make the payment of the deposit compensation to entitled persons in the territory of the other state, in the name, at the expense and in accordance with the instructions of the Guarantee System.
Related to the new requirements for cooperation of EU deposit insurance systems, the Financial Market Guarantee System (same as many other EU deposit insurance systems) signed the Multilateral Cooperation Agreement drafted by European Forum of Deposit Insurers. This Agreement introduces basic rules of cooperation and will be followed by more detailed „bilateral specifications“ signed between the Financial Market Guarantee System and related deposit insurance systems. The text of the Agreement is available in Documents.
Within the European Union, the Guarantee System is a full and active member of the European Forum of Deposit Insurers, a platform for cooperation and information sharing. The European Forum has 60 full and 11 associated members from 47 European countries. The European Forum of Deposit Insurers was founded in Vienna in October 2002 by 25 organisations. In 2007, the EFDI was transformed into an international non-profit association. The EFDI closely cooperates with bodies of the European Union.
Countries using the euro (the euro area) decided, as a consequence of the problems on the financial markets and in their institutions after 2008, to proceed faster towards banking union with a single supervisory authority, single resolution authority and common deposit insurance. The European Central Bank has a key role in this process.