Taking Counsel: Bank deposit guarantees increased in light of the financial crisis

  • 2008-11-05
  • By Darius Miniotas [Jurevicius, Balciunas & Bartkus]
On October 14, 2008 the Parliament of the Republic of Lithuania adopted the amendments to the Law on Insurance of Deposits and Liabilities to Investors of the Republic of Lithuania ("the Law") which shall come into effect from Nov. 1, 2008. Introduced amendments, for the period of one year (from Nov. 1, 2008 until Oct. 31, 2009), increase bank deposit guarantees to 345,280 litas (100,000 euros). Currently only deposits of up to 75,960 litas (22,000 euros) are insured: the first 10,400 litas (3,000 euros) are guaranteed 100 percent, the remaining amount 's 90 percent. Thus the total guaranteed amount prior to the amendments constituted approximately 69,400 litas (20,100 euros). It should be stressed that the guaranteed amount increased almost five times. These measures are taken in order to strengthen the confidence of the financial sector of Lithuania and to reduce the possibility of spreading the effects of the global financial crisis.

It shall be reminded that the Law lays down the procedure for insurance of deposits held with commercial banks established in the manner set forth in the laws of the Republic of Lithuania, subsidiaries/branches of foreign banks established in the Republic of Lithuania, the Central Credit Union and credit unions. An insured event occurs when bankruptcy proceedings commence against a bank, or a decision is taken by a supervisory authority (i.e. Bank of Lithuania), on the suspension of banking activities, acceptance of deposits or provision of investment services in the event a bank is not able to settle with creditors or is not able to meet its liabilities to the investors. The deposit insurance cover shall be provided for deposits of depositors in litas and foreign currency 's the U.S. dollars, euros and national currency of the Member States of the European Union and states of the European Economic Area.

The eligible depositors are any natural or legal person holding deposits with commercial banks, branches and credit unions of Lithuania with the exception of entities whose deposits under the Law may not be covered by insurance. It shall be noted that among one of the cases when the compensation does not apply is the case the deposits of borrowers of a bank exceed their liabilities (the outstanding loans and interest) thereof. If the deposit of a borrower of a bank, is in excess of his liabilities (the outstanding loans and interest), the insured sum shall be calculated by deducting the liabilities of the borrower from the deposit, however, within the limits specified above. The insured deposits are covered by the State Company "Deposit and Investment Insurance" and later reclaimed from the bank during the bankruptcy proceedings.

The aforementioned amendments to the Law were adopted as a result of the meeting of the EU Economic and Financial Affairs Council (ECOFIN) as of Oct. 7, 2008 where EU finance ministers have decided to raise minimum bank deposit guarantees across all 27 Member States and to take coordinated action to save financial institutions in a bid to calm ordinary people and markets amid the financial crisis. Although it was agreed that deposit guarantee protection for savers of at least 50,000 euros should be provided, some Member States, including Lithuania, decided to raise their minimum to 100,000 euros. On Oct. 15, 2008 the European Commission has put forward a revision of EU rules on deposit guarantee schemes that puts into action the commitments made by EU Finance Ministers in the meeting of ECOFIN on Oct. 7, 2008 by amending the Directive on Deposit Guarantee Schemes (1994/19/EC). Among the main changes proposed are aforementioned increased level of coverage for deposits and the requirement for the Member States to increase the coverage level to at least 50,000 euros and within a further year to at least 100,000 euros, as well as the reduction of the payout period to three days. Currently the payout period is three months and can even be extended to nine months.

It shall be noted that the agreement to increase bank deposit guarantees marked the first concrete EU-wide concerted action against the financial crisis after a series of countries took individual steps to protect depositors. The EU-wide solution is considered the best way to coordinate national actions and maximize their effectiveness, and at the same time, secure that negative spill-overs into other financial institutions and member states are limited. 
Undertaken measures should raise the confidence of the depositors to entrust their savings within the banks and to soothe the inadequate nervous atmosphere regarding the insecurity of the bank deposits.

Darius Miniotas  is an associate advocate at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.