The history of deposit guarantee in Finland
Finland has a long tradition of protecting depositors. While the key elements of deposit guarantees have remained largely unchanged, the responsibility for the deposit guarantee scheme has been transferred from guarantee funds to the old deposit guarantee fund under Finance Finland and subsequently to the Financial Stability Authority. The level of protection and the speed of compensation payments have improved over time.
Deposit guarantees were first managed by guarantee funds
Tasks related to deposit guarantees were first managed by guarantee funds. They safeguarded the stability of banking operations and the deposits of Finnish citizens. Local banks had their own guarantee funds as early as the 1930s. Being part of a guarantee fund became mandatory for all commercial banks, savings banks and cooperative banks in 1970. There were three guarantee funds in Finland at the time: the guarantee fund of commercial banks and Postipankki Ltd, the Savings Banks’ Guarantee Fund and the guarantee fund of Osuuspankki cooperative banks.
The guarantee funds were responsible for supporting the solvency of banks and providing deposit guarantees. Depositors were entitled to deposit guarantee compensation if a bank or bankruptcy estate that was in liquidation or declared bankrupt did not have sufficient funds to cover the receivables of its depositors.
EU membership led to changes in legislation
Deposit guarantee schemes have been governed by EU regulations for a long time. When Finland joined the EU in 1995, the Deposit Guarantee Scheme Directive (94/19/EC) needed to be implemented in Finnish legislation. Following the national implementation of the Deposit Guarantee Scheme Directive, the payment of deposit guarantee compensation was no longer only applicable in the event of a bank being in liquidation or bankrupt, as a compensation event could also emerge based on a depositor’s notification.
In the early days of Finland’s EU membership, the deposit guarantee scheme was still the responsibility of the guarantee funds, with the Financial Supervisory Authority’s predecessor, Rahoitustarkastus, assessing whether the conditions for the payment of deposit guarantee compensation were met. Eligibility for deposit guarantee compensation was conditional on the failure to repay deposits being caused by the bank having financial difficulties that were not temporary according to the estimate of Rahoitustarkastus and the bank having provided an adequate account of the difficulties in question.
The old deposit guarantee fund was established as a consequence of the banking crisis
A separate deposit guarantee fund was established in 1997. The change stemmed from the 1990s banking crisis, during which it was observed that the operating model of the guarantee funds was neither sufficient nor appropriate. The Finnish State had to establish its own guarantee fund to resolve the banking crisis. The old deposit guarantee fund was established in connection with the central federation of the financial industry (now known as Finance Finland). Establishing the new fund separated the deposit guarantee system from the guarantee funds, which were left with the task of safeguarding the stability of banks. However, belonging to a guarantee fund was no longer necessary for banks after this change. All of the guarantee funds were eventually wound down and no liabilities were transferred from them to the deposit guarantee fund.
The decision was made to separate the deposit guarantee fund from the guarantee fund system because the assets of the guarantee funds could also be used to support the solvency of banks. In a crisis, the assets of the guarantee fund would likely have been used to support the solvency of its member banks, and no assets would have been left for the payment of deposit guarantee compensation.
The model consisting of three separate guarantee funds was also problematic because the costs arising from the deposit guarantees scheme were not effectively divided between deposit banks. The old guarantee fund model also meant that, in practice, individual banks had to bear responsibility for the risks of the fund’s other member banks. In the financing model of the guarantee funds, the contributions were based purely on the banks’ balance sheet rather than their level of risk, which was considered problematic.
Banks began to finance the old deposit guarantee fund in 1998. From 1997 to 2008, the maximum deposit guarantee compensation amount was EUR 25,000. The maximum amount was increased to EUR 50,000 in 2008 and subsequently to its current level of EUR 100,000 in 2010. The increase in the maximum compensation amount was based on amendments to the EU Deposit Guarantee Scheme Directive.
The old deposit guarantee fund under the central federation of the financial industry was responsible for the deposit guarantee scheme until the end of 2014 and the entry into force of the current legislation. Since then, the Finnish deposit guarantee scheme has been the responsibility of the Financial Stability Authority. The scheme that previously operated under the central federation of the financial industry was abolished and it no longer has tasks related to maintaining the deposit guarantee scheme. However, the legislation stipulated that the previously accrued assets would be left in the old fund, which would continue to be maintained by Finance Finland.
The fund was renamed as the VTS Fund to prevent it from being confused with the official deposit guarantee scheme. The VTS fund acts as a buffer fund for the Deposit Guarantee Fund and its assets cannot be used for other purposes than covering the costs incurred from the deposit guarantee scheme.
The deposit guarantee scheme is subject to continuous development
Deposit guarantees must continue to protect depositors effectively in the future. The Financial Stability Authority is closely involved in the development of European deposit guarantees and related legislation through international cooperation. The Authority also assists the Ministry of Finance by providing expert support in legislative projects and special issues pertaining to deposit guarantees.
The banking union currently has a Single Supervisory Mechanism and a Single Resolution Mechanism. The question of whether the banking union should be supplemented with a single deposit insurance scheme is the subject of widespread discussion. If the banking union’s single deposit insurance scheme is implemented, the Financial Stability Authority will become part of EDIS, which will consistently safeguard the depositors and deposits of the countries in the banking union.