Banks will need greater reserves

IRISH BANKS will have to significantly increase their levels of cash reserves over the next decade to cover an EU-wide deposit guarantee scheme (DGS) directive which is being proposed to ensure account holders receive money faster in greater amounts if their banks fail.

If introduced, the scheme, which aims to tighten up consumer protection in the case of bank failures and fraud, will introduce a harmonised coverage level which will protect consumers deposits of up to €100,000 in the event of a bank collapse.

While the Republic already has a DGS, banks are currently required to hold just 0.2 per cent of all deposits in reserve to cover it. At present this amounts to a little over €600 million.

Under the proposed new scheme banks will be required to hold 1.5 per cent of the deposit accounts which are eligible to be covered under the scheme.

Based on the number of accounts in the Republic today, that sum could be just less than €3 billion. The reserves will be built up over a transition period of 10 years.

The DGS directive proposes to ensure that account holders receive their money within seven days of a bank failing, and says investors will be able to recoup up to €100,000.

An investor protection scheme is also being proposed which is designed to compensate against acts of fraud and malpractice. It plans to increase levels of compensation from €20,000 to €50,000 in the case of customers losing money due to malign practices.

Officials from the Central Bank and the Irish Banking Federation (IBF) came before the Joint Oireachtas Committee on European Scrutiny to give their perspective on the EU directive, and while both broadly welcomed the proposals the IBF expressed concern that the proposed level of reserve funding was higher than those required by other schemes worldwide. It said the US mandates a funding level of 1.25 per cent, and warned that discrepancies could lead to “competitive distortions”.