Guarantor Liability and Deposit Protection

In 2002 the EU Commission denied Germany’s regional banks the privilege of guarantor liability, justifying its decision by arguing that this constituted a distorting form of support. Thanks to the fact that guarantor liability for the regional banks’ creditors gave them direct repayment claims on the German State, the regional banks had previously enjoyed very favourable access to credit. The state banks invested their funds worldwide and earned high profits, which they reinvested to a fraction than is normal for private banks. This led to soaring growth in their balance sheets. The EU Commission’s decision forced the state banks to change their business models and plunged them into serious difficulties. In view of the justifiable and tough stance adopted by the EU with regard to Germany’s banks, it is very surprising that the very same institution is now failing to demand similar guarantees for all banks in the Eurozone.

The EU Guideline on winding up ailing banks entitled the: Bank Recovery and Resolution Directive (BRRD) of April 2014 stipulates that every nation state in the Eurozone must build up its own national system for protecting deposits of up to 100,000 euros per account. In reality, however, this regulation only exists in writing, as many states do not have the funds to cover such liabilities. In Germany legal deposit protection per account and per institute of up to 100,000 euros already exists. Banks in Germany are only allowed to operate if they can prove that they belong to a state-recognised deposit protection fund that provides appropriate promises of guarantee. The respective systems sometimes have to be topped up to protect 0.8 % of covered deposits. That is the current legal situation in Germany, but is not certain how long it will continue, since preparations for further communitisation initiatives are already underway.

Non-refereed scientific monographs


The German State Banks. Global Players in the International Financial Markets, Edward Elgar: Aldershot, 1999, 140 pages. (English translation of Der Staat im Bankwesen....) To Amazon.




Ifo Viewpoints

Ifo Viewpoint No. 93: The German State Banks: Creative Destruction, May 8, 2008.