Deposit protection: Protecting your savings
Consumers often prefer a particularly safe form of investment. This is one of the reasons why classic bank deposits, such as current accounts, demand deposit accounts, savings books or term deposit accounts, are so popular. What all of these forms of investment have in common is that the funds invested in them are guaranteed by a deposit guarantee.
If a bank files for bankruptcy, depositors usually get their money back anyway. Thus, classic savings investments are almost one hundred percent safe. However, even legislative and voluntary deposit insurance programs have their limits. Here you can learn how deposit insurance works, what amounts and types of investments remain protected, and what customers should look out for.
What is deposit insurance?
Deposit insurance is a protection mechanism that protects depositors’ capital and savings. Since classic savings investments are usually not subject to price fluctuations, the only theoretical risk for savers is the insolvency or default of their bank. Deposit protection was created precisely for this case.
If a bank can no longer pay out its customers’ deposits due to financial difficulties, the deposit guarantee takes effect and refunds customers their money up to a certain amount. In Germany, all banks are required to carry mandatory deposit insurance. In addition, most financial institutions offer additional voluntary deposit insurance, which provides additional and thus even more extensive capital protection.
The legal deposit insurance scheme in Germany is based on the European Directive on Deposit Guarantee Schemes (DGSD) and has been regularly updated in recent years to meet EU requirements, improved and, according to the Federal Ministry of Finance, harmonized. Until 2009, for example, the original German deposit guarantee scheme provided for a deposit guarantee of up to 90 percent of the amount invested, but no more than 20,000 euros.
The rules have since been raised, so that 100 percent of deposits are guaranteed up to a total of 100,000 euros. This guarantee applies to each individual and institution. Deposits in a joint account of a married couple, for example, will be protected up to 200,000 euros by the deposit guarantee established by law.
The total amount applies to each banking institution
The total amount applies to one banking institution at a time. Thus, everyone who has invested more than 100,000 euros in a banking institution, as well as in parent companies and subsidiaries, will be reimbursed a maximum of 100,000 euros in the event of insolvency.
Through investor compensation, the deposit guarantee additionally covers claims for securities transactions such as dividends, distributions and proceeds of sale if they can no longer be paid. In this area, 90 percent of liabilities up to a maximum amount of 20,000 euros are legally protected. Investments in securities themselves are not deposits and therefore do not belong to the bank, but are only managed by the bank.
Therefore, in the event of insolvency, the deposit can simply be transferred to another bank without the insolvent bank having to deposit the money. Therefore, such investments generally do not require deposit protection. Thus, investors are compensated if the investor has sold securities or is entitled to receive dividends and the bank cannot pay out the money.
Legislative deposit insurance primarily serves to protect private investors. This includes:
- Civil law partnerships
- Registered associations
- Small businesses
These are. The establishment is funded by annual contributions from its members. According to BaFin, these assets are managed as special assets of the federal government.
Savings banks and cooperative banks are not members, but have their own so-called custodian institutions and are exempt from compulsory membership in the statutory compensation system. In the case of savings banks, the protection of deposits is provided by the German Savings and Girondist Association (DSGV), which has formed and manages a corresponding support fund.
In the case of cooperative banks this is organized somewhat differently – through the Federal Association of German Cooperative Banks: if a cooperative bank has financial problems, it is supported by the other members of the association. Thus, both Sberbank, Volksbank and Raiffeisenbank guarantee their customers one hundred percent protection of deposits for an unlimited amount and thus clearly exceed legislative and European requirements.