Scope of this report is the assessment of the impact of increasing the DGS level of coverage for banks¿ deposits (from current levels up to 50K¿ or possibly 100K¿) as a consequnce of the 2008 financial crisis.JRC.G.9-Econometrics and statistical support to antifrau

CAMPOLONGO Francesca

JOOSSENS Elisabeth

PETRACCO GIUDICI Marco

UBOLDI Adamo

Scope of this report is the assessment of the impact of increasing the DGS level of coverage for banks� deposits (from current levels up to 50K� or possibly 100K�) as a consequnce of the 2008 financial crisis.JRC.G.9 - Econometrics and statistical support to antifrau

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           Change in the DGS level of coveragedue to the 2008 financial crisis: first basic impact evaluation          A. Uboldi, E. Joossens, M. Petracco, F. Campolongo                                EUR 23673 EN - 2008The Institute for the Protection and Security of the Citizen provides research-based, systems-oriented support to EU policies so as to protect the citizen against economic and technological risk. The Institute maintains and develops its expertise and networks in information, communication, space and engineering technologies in support of its mission. The strong cross-fertilisation between its nuclear and non-nuclear activities strengthens the expertise it can bring to the benefit of customers in both domains.              European Commission Joint Research Centre Institute for the Protection and Security of the Citizen  Contact information Address: Unit G-09, Action FINECON E-mail: adamo.uboldi@jrc.it Tel.: +39-0332-785287 Fax: +39-0332-785733  http://ipsc.jrc.ec.europa.eu/ http://www.jrc.ec.europa.eu/  Legal Notice Neither the European Commission nor any person acting on behalf of the Commission is responsible for the use which might be made of this publication.  Europe Direct is a service to help you find answers to your questions about the European Union  Freephone number (*): 00 800 6 7 8 9 10 11  (*) Certain mobile telephone operators do not allow access to 00 800 numbers or these calls may be billed.  A great deal of additional information on the European Union is available on the Internet. It can be accessed through the Europa server http://europa.eu/  JRC 49376   EUR 23673 EN ISBN 978-92-79-11093-1  ISSN 1018-5593 DOI 10.2788/5783  Luxembourg: Office for Official Publications of the European Communities  © European Communities, 2008  Reproduction is authorised provided the source is acknowledged  Printed in Luxembourg   2  EUROPEAN COMMISSION DIRECTORATE GENERAL JRC JOINT RESEARCH CENTRE      Change in the DGS level of coverage due to the 2008 financial crisis: first basic impact evaluation    A. Uboldi, E. Joossens, M. Petracco, F. Campolongo    Scope of the analysis  Scope of this analysis is the assessment of the impact of increasing the DGS level of coverage for banks’ deposits from current levels up to 50K€ or possibly 100K€.   Methodology  The impact of increasing the minimum level of coverage is measured as the increase in the amount of deposits covered. This is achieved by computing the difference between  • A, the total amount of deposits covered today (applying the current coverage levels), i.e. the total amount of money which would be needed to reimburse all entitled deposits (up to the coverage limit),  • B, the total amount of deposits covered under a new scenario (i.e. applying the new coverage levels under the hypothesis of a new minimum enforced by European legislation).  The focus is then on estimating the amounts A and B. In order to estimate A and B, one should know the distribution of deposits today, and from that to derive the total amount covered respectively under the current and the new (or hypothetical) coverage levels.  The problem then reduces to estimating the distribution of deposits.  However data to estimate the distribution of deposits (both in terms of number and amount of deposits) are currently not available to JRC. A request has been forwarded to Central Banks and data may be released in the coming days.  In the meantime, we try to produce rough estimates of the maximum and minimum impacts under a set of assumptions.   4First framework (maximum impact evaluation)   We assume that the recent crisis has dramatically changed the level of information on deposit protection in general, and more specifically on the part of deposit which is guaranteed (reimbursed) in case of bank failure.  We therefore assume that, given the achieved public awareness, all depositors will redistribute their money among different bank accounts so to have the complete amount covered. In other words we assume that all deposits will lie below the level of coverage.  In this framework, quantity B, which is the total amount of money needed to reimburse all covered deposits, will be close to the total amount of eligible deposits (where by eligible deposits we mean deposits that fall under Directive 94/19/EC on Deposit Guarantee Schemes).  A complete coincidence is not a realistic hypothesis (i.e. big firms accounts cannot be split into a large number of separate small accounts), but it can be considered a reasonable approximation. Under this hypothesis there is no need to know the distribution of deposits. It is sufficient to know the overall amount of eligible deposits. Figures on the total amount of eligible deposits can be found in the 2006 JRC report on minimum level of coverage1 and in the 2007 JRC report on the efficiency2. These reports contain also an estimate of quantity A, the total amount of deposits covered under the nationally enforced limits which were valid up to a few weeks ago.   Note that one of the limitations of the present estimate is that the reports contain data on 2004, while the update deals with 2005. Estimates will be updated once more recent data will be made available.  The impact obtained under the assumptions of this framework can be considered as an upper estimate. Also note that under the strong assumption of re-distribution of deposits (in order to achieve the maximum possible protection) the level of the coverage limit has very little impact. No matter the value of the coverage level, each deposit will stay below it and depositors will protect the complete amount of their capital. This could happen also in the case of no change in the coverage level: the change in public awareness alone is sufficient to produce an impact. The table below summarizes the impact in this framework.                                                    1 2006 JRC report “Estimating the effects of changing the funding mechanisms of EU Deposit Guarantee Schemes” 2 2007 JRC report "Investigating the Efficiency of EU Deposit Guarantee Schemes"  5Table 1: Impact of framework1. Assumption: depositors quick reaction to crisis, which means all deposits will be below the level of coverage. Data are from 2005. The column in violet provides an upper bound for the impact. Last two columns provides relative impact with respect to eligible and covered deposits.  data absolute exposure relative exposure   eligible (m€)  covered (m€) level of coverage (2007, €) cov - eli    (m€) percentage of cov - eli over eli  percentage of cov - eli over cov    A B C A-B (A-B)/A (A-B)/B BE 215,427 115,281 20,000 100,146 46.49% 86.87% CZ 57,943 31,541 27,778 26,402 45.57% 83.71% DK 128,594 57,308 40,000 71,286 55.44% 124.39% DE 1,911,376 1,022,827 22,222 888,549 46.49% 86.87% EE 4,283 1,667 22,222 2,616 61.07% 156.88% IE 177,947 95,224 22,222 82,723 46.49% 86.87% GR 118,736 63,539 20,000 55,197 46.49% 86.87% ES 636,538 315,796 20,000 320,742 50.39% 101.57% FR 1,018,478 620,604 70,000 397,874 39.07% 64.11% IT 583,075 427,815 103,291 155,260 26.63% 36.29% CY 31,030 10,433 22,222 20,598 66.38% 197.43% LV 8,606 1,610 20,000 6,997 81.30% 434.65% LT 7,078 3,702 20,000 3,375 47.69% 91.17% LU 89,054 12,437 20,000 76,616 86.03% 616.01% HU 36,788 20,272 25,924 16,515 44.89% 81.47% MT 5,706 4,799 22,222 907 15.89% 18.89% NL 482,343 293,913 40,212 188,430 39.07% 64.11% AT 185,000 117,347 20,000 67,653 36.57% 57.65% PL 94,801 90,068 22,500 4,734 4.99% 5.26% PT 123,886 63,108 25,000 60,778 49.06% 96.31% SI 12,468 7,130 21,294 5,337 42.81% 74.85% SK 10,982 10,876 22,222 106 0.96% 0.97% FI 80,577 38,271 25,000 42,307 52.50% 110.55% SE 115,745 56,133 26,628 59,613 51.50% 106.20% UK 1,091,493 665,095 51,072 426,398 39.07% 64.11% EU 25 total 7,227,953 4,146,796   3,081,157     EU 25 average     30,081   44.91% 117.36%      6Second framework (minimum impact evaluation)  In this framework we assume that the distribution of deposits remains unchanged, or in other words, we assume that owners of large accounts will not react by splitting them in order to bring them under the coverage level. Under this assumption, a lower bound for the cost in each country could be estimated. In this framework only a part of the total amount of money is held in accounts below the coverage threshold, while there are several accounts with an amount of money above it. It then becomes important to know the distribution of the deposits.  As data on the distributions are not available, we introduce an approximation procedure detailed below. This procedure provides an underestimate of the lower bound of the total amount covered under the new coverage level. Table 2 and Table 3 summarize the impact evaluation of changing the coverage level to 50K and 100K. The third and fourth column contain the estimated covered amount for each country, which are obtained using the approximation procedure described above and coverage levels respectively of 2007 and newly proposed ones. Reference data are form 2003. The absolute and relative impacts are presented in the later columns. For those countries having a coverage level in place exceeding the newly proposed levels the impact is zero.    7Table 2: Impact of Framework 2 using a new coverage level of 50,000. Assumption: depositors do not react to crisis, which means that distribution of deposits remains unchanged. Data are from 2003.   data estimations absolute exposure relative exposure   eligible     (m€)  estimated  2003 covered  (m€, 2007 coverage level) estimated covered     (50K€ level) estimated cov (50K€ level) –   cov percentage of estimated cov (50K€ level) over  cov percentage of estimated cov (50K€ level) over eli   A B C C-B (C-B)/B (C-B)/A BE 188,791 83,449 149,621 66,172 79.30% 35.05% CZ 40,854 39,734 40,600 866 2.18% 2.12% DK 106,029 66,693 76,679 9,986 14.97% 9.42% DE 1,615,946 824,645 1,355,457 530,812 64.37% 32.85% EE 2,590 2,394 2,531 137 5.74% 5.31% IE 143,226 54,563 98,156 43,593 79.89% 30.44% GR 98,926 56,488 84,303 27,816 49.24% 28.12% ES 575,940 331,756 492,041 160,284 48.31% 27.83% FR 839,391 774,272 714,415 -     IT 511,527 463,528 405,080 -     CY 16,887 15,260 16,596 1,336 8.76% 7.91% LV 5,115 4,751 5,035 284 5.98% 5.55% LT 3,903 3,755 3,896 141 3.75% 3.61% LU 86,734 37,515 68,001 30,486 81.26% 35.15% HU 27,649 26,330 27,389 1,059 4.02% 3.83% MT 4,617 4,172 4,538 365 8.76% 7.91% NL 264,839 203,688 226,937 23,249 11.41% 8.78% AT 158,338 69,763 136,647 66,883 95.87% 42.24% PL 63,934 57,805 62,393 4,588 7.94% 7.18% PT 108,384 86,250 106,078 19,828 22.99% 18.29% SI 10,760 7,427 10,688 3,261 43.90% 30.31% SK 10,150 8,784 9,904 1,120 12.75% 11.03% FI 68,948 43,568 60,816 17,248 39.59% 25.02% SE 113,094 67,872 96,393 28,520 42.02% 25.22% UK 1,728,510 1,054,517 1,042,693 -     EU 25 total 6,795,082 4,388,980 5,296,887 1,038,035     EU 25 average         33.32% 18.33%   8  Table 3: Impact of Framework 2 using a new coverage level of 100,000. Assumption: depositors do not react to crisis, which means that distribution of deposits remains unchanged. Data are from 2003.   data estimations absolute exposure relative exposure   eligible     (m€)  estimated 2003 covered (m€, 2007 coverage level) estimated covered     (100K€ level) estimated cov (100K€ level) cov percentage of estimated cov (100K€ level) over cov  percentage of estimated cov (100K€ level) over  eli   A B C C-B (C-B)/B (C-B)/A BE 188,791 83,449 170,762 87,313 104.63% 46.25% CZ 40,854 39,734 40,769 1,035 2.61% 2.53% DK 106,029 66,693 96,313 29,620 44.41% 27.94% DE 1,615,946 824,645 1,525,817 701,172 85.03% 43.39% EE 2,590 2,394 2,558 164 6.84% 6.32% IE 143,226 54,563 121,383 66,820 122.46% 46.65% GR 98,926 56,488 91,021 34,533 61.13% 34.91% ES 575,940 331,756 525,234 193,477 58.32% 33.59% FR 839,391 774,272 801,342 27,070 3.50% 3.22% IT 511,527 463,528 463,112 -     CY 16,887 15,260 16,754 1,494 9.79% 8.85% LV 5,115 4,751 5,073 323 6.80% 6.31% LT 3,903 3,755 3,902 147 3.90% 3.75% LU 86,734 37,515 77,950 40,435 107.78% 46.62% HU 27,649 26,330 27,558 1,228 4.67% 4.44% MT 4,617 4,172 4,581 409 9.79% 8.85% NL 264,839 203,688 259,594 55,906 27.45% 21.11% AT 158,338 69,763 154,617 84,854 121.63% 53.59% PL 63,934 57,805 63,175 5,370 9.29% 8.40% PT 108,384 86,250 108,123 21,873 25.36% 20.18% SI 10,760 7,427 10,760 3,332 44.87% 30.97% SK 10,150 8,784 10,037 1,253 14.27% 12.35% FI 68,948 43,568 65,109 21,541 49.44% 31.24% SE 113,094 67,872 106,756 38,884 57.29% 34.38% UK 1,728,510 1,054,517 1,315,777 261,259 24.78% 15.11% EU 25 total 6,795,082 4,388,980 6,068,074 1,679,510     EU 25 average         41.92% 22.96%   9 Technical procedure  Data on the distribution of the amount of eligible deposits are not available. Nevertheless, some information can be extracted from the 2005 JRC report3, which contains data in the following form. Bank eligible deposits are divided into groups/buckets and for each bucket the total amount of capital within the bucket is provided (in other words the sum of all deposits containing an amount falling within the bucket is given). The buckets can be split up into three groups: - the buckets for which the upper bound falls under the coverage level, - the buckets completely exceeding the coverage level, and - the bucket containing the coverage level. An account which has a value below the coverage level is completely covered. Hence for the first group of buckets the total amount covered is equal to the total eligible accounts. For accounts exceeding the coverage level there is only coverage up to the coverage level. Hence we should know the number of accounts exceeding this coverage level.  As we only have the total amount per bucket we can estimate the minimum number of accounts present in a bucket. It is the ratio of the total amount and the upper bound of the bucket.  By multiplying this minimum number of accounts by the coverage level we have a lower bound for the total amount covered for this bucket. No information is included for the highest bucket, since the same argument does not apply. For this reason, in Figure 1 the last bucked is made up entirely by uncovered deposits: we insist on the fact that this estimate is a “lower bound” estimate. The bucket containing the coverage level should be treated with care, as it contains accounts entitled to be fully covered and account to be partially covered. In absence of other information, we assume that data within this bucket is uniformly distributed. Under this assumption, we can estimate the total amount within the bucket which falls under the coverage level:  it is obtained by multiplying the total amount by the share of deposits below the coverage level (which is given by (coverage level-lower limit)/(upper limit-lower limit)). This amount has to be fully covered.  The remaining amount (representing the total amount of eligible accounts within the bucket exceeding the coverage level) is calculated with the same approach described above for exceeding buckets.  Hence the total amount of coverage for the deposits within this bucket results to be:  UL/LL-ULCL-UL*TAED*CLLL-ULLL-CL* TAED  ⎟⎠⎞⎜⎝⎛+ ,                                                  3 2005 JRC Report “Minimum guarantee level of Deposit Guarantee Schemes Directive 94/19/EC”  10 where TAED stands for total amount of eligible deposits, CL for coverage level, LL for the lower limit and UL for the upper limit of the bucket.   Adding up the total amount of coverage for each bucket provides a lower limit for the total amount covered in each country.   Distribution of deposits0501001502002503000-10 10-20 20-30 30-40 40-50 50-60 60-70 70-80 80-90 90-100 100-110 110-120 120-130 >130Size of deposits (K€)Total amount of deposits (b€)Not coveredCovered under 100K€Covered under 50K€Covered under 20K€ Figure 1: example of estimation of covered amount                       11European Commission  EUR 23673 EN – Joint Research Centre – Institute for the Protection and Security of the Citizen  Title: Change in the DGS level of coverage due to the 2008 financial crisis: first basic impact evaluation Author(s): A. Uboldi, E. Joossens, M. Petracco, F. Campolongo Luxembourg: Office for Official Publications of the European Communities 2008 – 14 pp. – 21 x 29.7 cm EUR – Scientific and Technical Research series – ISSN 1018-5593 ISBN 978-92-79-11093-1  DOI 10.2788/5783       12How to obtain EU publications  Our priced publications are available from EU Bookshop (http://bookshop.europa.eu), where you can place an order with the sales agent of your choice.  The Publications Office has a worldwide network of sales agents. You can obtain their contact details by sending a fax to (352) 29 29-42758.    13The mission of the JRC is to provide customer-driven scientific and technical supportfor the conception, development, implementation and monitoring of EU policies. As a service of the European Commission, the JRC functions as a reference centre of science and technology for the Union. Close to the policy-making process, it serves the common interest of the Member States, while being independent of special interests, whether private or national.     LB-NA-23673-EN-C                                   14

Change in the DGS Level of Coverage Due to the 2008 Financial Crisis: First Basic Impact Evaluation

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Change in the DGS Level of Coverage Due to the 2008 Financial Crisis: First Basic Impact Evaluation

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