Deposit guarantee is a pillar of savers’ confidence in the banking system. When a bank defaults, the Luxembourg Deposit Guarantee Fund (FGDL) makes €100,000 per depositor available to clients within seven days. What is the share of guaranteed deposits across the market? may come as a surprise.
In relation to the total amount of deposits eligible for the deposit guarantee, the proportion of guaranteed deposits is only 29%. This average conceals significant variations, linked to the diversity of business models. While private banks, with fewer accounts but larger deposits, have a lower proportion of guaranteed deposits, retail banks, with more accounts and smaller amounts, have a higher percentage. This percentage generally exceeds 40% for large retail banks, according to the CSSF.
How should these figures be interpreted? Claude Wampach, director of banking supervision at the CSSF, doesn’t get ahead of himself: “There is no mechanical interpretation, no natural or conservative limit to be respected. That is why this indicator is not monitored in aggregate, but used in case-by-case analyses.”
The share of guaranteed deposits in the EEA
On average, covered deposits represent 57.4% of eligible deposits (median: 60.8%). Source: EBA/Report on deposit cover
To put this into context, we need to turn to the European Banking Authority (EBA) and its Deposit Coverage Report, which analyses data collected from 28 countries in the European Economic Area between January 2022 and August 2023. The report shows that covered deposits average 57.4% of eligible deposits. Does this mean that Luxembourg, with its small 30%, is more vulnerable to a property crisis, for example?
The above-mentioned report does not assess whether a given proportion of unsecured deposits represents a source of vulnerability or not. Adequate deposit protection can certainly, says the EBA, prevent a run on bank counters by reducing the incentive for depositors to withdraw their funds suddenly. However, “the level of coverage, and therefore the proportion of deposits covered, is only one of many factors likely to influence the risk of a mass withdrawal of deposits,” explains a spokesperson for the authority.
71% of bank deposits in Luxembourg are at risk in the event of bank failures.
Investor representatives are less sanguine. Guillaume Prache, founder and senior adviser of Better Finance, the European Federation of Investors and Users of Financial Services, finds the Luxembourg figures “surprising and a little worrying.” “If the proportion of Luxembourg banks’’deposits that are guaranteed is only 29%, that means that 71% of bank deposits in Luxembourg are not guaranteed and are at risk in the event of bank failures,” he says.
Looking at the EBA data, the expert observes that Luxembourg’s situation is more the exception than the rule: “In most other European countries, individual depositors are fairly well covered--between 70% and 90%, compared with 40% in Luxembourg. This may be due to the partly ‘offshore’ nature of Luxembourg banks, with probably a large proportion of high net worth non-resident deposits--on average well in excess of the guaranteed €100,000. But that’s just a hypothesis.”
While he sees these figures as a potential danger for the economic model and financial stability of the Luxembourg financial centre, Prache stresses above all the need for greater transparency: “We need more detailed information from the regulators to appreciate the magnitude of the risk that this could represent.”
The deposit guarantee seems difficult to implement in the event of major asset losses.
In particular, the question is whether this risk is borne by a large number of depositors. When asked about the proportion of Luxembourg bank customers with more than €100,000 in their accounts, the CSSF does not have this information on an aggregate basis.
A glance at the pyramid of fortunes, i.e., the distribution of household wealth in Luxembourg, allows the ‘social risk’ associated with the high proportion of unsecured deposits to be put into perspective. According to the latest survey by the Central Bank of Luxembourg, dating from 2021, the median Luxembourg citizen owns more than most nationals of other EU countries, but in terms of wealth distribution, the country presents a profile comparable to the others.
“Social risk is no greater in Luxembourg than elsewhere,” says economist and former Belgian banker Bruno Colmant. “The country has an atypical situation, marked by a concentration of high deposits, largely of foreign origin. On the one hand, given the amounts involved, it would be difficult to operate a deposit guarantee in the event of major asset losses. On the other hand, if the state had to intervene one day to compensate its own nationals, I think it would do so.”
These figures say nothing about the banks’ risks: we're talking about customer risk.
The banks are analysing the CSSF figures with caution. “These percentages depend solely on the banks’ business model. In themselves, they are neither worrying nor reassuring,” says the Luxembourg Bankers’ Association (ABBL) through its head of communications, Paul Wilwertz. “And these figures say nothing about the risks faced by banks: we are talking here about the risk of a bank failure for customers.”
For the ABBL, it is wrong to establish a direct link between the proportion of guaranteed deposits and the risk of a massive withdrawal. “A bank run is a liquidity risk, and liquidity is measured on both sides, on the assets and liabilities sides,” explains Wilwertz. Put crudely, the challenge for the bank is to have enough liquidity in its assets to be able to repay customers who decide to withdraw their deposits.
It is crucial to monitor this data, especially as it is not regulated.
Professor of finance at the University of Luxembourg, Diane Pierret adds an extra dimension to the discussion: “If there are more deposits that are not guaranteed, but the bank has sufficient liquidity to repay these deposits, this reduces the size of the bank but has no direct macroeconomic effect. However, if the bank has to sell illiquid assets at low prices to repay, this can generate losses and affect the stock market valuation of banks that hold the same assets.”
Regarding the view that these percentages are in themselves neither worrying nor reassuring, Pierret does not contradict the ABBL, but warns: “Admittedly, these figures are not enough, but it is crucial to monitor these data, especially as they are not regulated or easily observable in Europe, unlike in the United States where they are public.” She goes on to express surprise that the CSSF does not monitor this indicator in aggregate, particularly given the , which collapsed in March 2023.
The CSSF provides more details
After the publication of this article, the CSSF provided several clarifications. Its message: deposits are no less well protected in Luxembourg than elsewhere in Europe. “The FGDL protects savers in Luxembourg in the proportions required by European regulations, that is to say, up to €100,000 per depositor within the single market. What’s more, in Luxembourg, the legislator decided that the FGDL be pre-financed to the tune of 1.6% of covered deposits, while the European standard only requires pre-financing to the tune of 0.8%,” says the CSSF.
Second message from the regulator: if, in private banking, wealthy clients have deposits that exceed the minimum covered by the guarantee, this does not mean that they would only recover €100,000 in the event of default, regardless of their liquid assets placed in the bank. “During the liquidation, the client will recover the remainder of his liquid assets, in proportion to the bank’s assets which will be realised by the liquidator,” underlines the CSSF.
“Assets in the form of securities, which banks are required to keep in segregated accounts, do not fall into the liquidation pool. Thus, the share of liquidity that a client will find at the end of liquidation depends on the risks taken by the bank. It is established that private banks operate much less risky business models in order to give their clients the necessary comfort that their liquidity exceeding €100,000 is adequately protected.”
Sufficient coverage
It should be noted that guarantee limits differ on both sides of the Atlantic: €100,000 in the EU compared with $250,000 in the United States. Should the level of cover be increased in Europe? For the EBA, this is not necessary. The authority believes that an increase would have limited benefits in terms of financial stability and consumer protection, with a negative impact on moral hazard and significant costs for the banking sector.
Pierret goes even further: “Raising this limit could unintentionally increase the link between banking risk and sovereign risk, reducing the credibility of deposit insurance. In the context of a sovereign debt crisis such as that experienced by Greece, this insurance is no longer of any value.”
This article was first published in French on . It has been translated and edited for Delano.
Article amended with clarifications and additional details from the CSSF on Monday 1 July at 16:45.