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Letter of 11 June 2010 to Commissioner Michel Barnier

Letter to Commissioner Barnier concerning the changes adopted to the Deposit Guarantee Schemes Directive (Directive 94/19/EC).

Dear Commissioner Michel Barnier,

I refer to the letter of 1 October 2009 from Charlie McCreevy, former Commissioner responsible for Internal Market and Services, concerning the changes adopted to the Deposit Guarantee Schemes Directive (Directive 94/19/EC).  I also refer to my letter to you dated 12 March 2010, in which I gave notice that I would be writing to you in the near future on this matter, which is of great importance to Norway, and to your letter to me of 26 April 2010.

1. Introduction
Let me first say that I support the general work currently being conducted by the Commission on revising the Deposit Guarantee Schemes Directive and the efforts to improve financial regulation. A robust and efficiently-functioning deposit guarantee scheme and sound general regulation are key elements in safeguarding financial stability and avoiding banking crises.

The current Norwegian deposit guarantee scheme providing coverage of NOK 2 million (approximately € 250 000) per depositor per bank was established in 1996 in the wake of the Norwegian banking crisis of the early 1990s, and forms an important part of the Norwegian system of financial regulation. The level of cover of NOK 2 million has remained unchanged since 1996. In combination with comprehensive and consistent regulation of the financial sector in Norway, the Norwegian deposit guarantee scheme helped to avert a run on Norwegian banks during the international financial crisis in the autumn of 2008. The scheme created stability and calm around the banks. Moreover, the Norwegian authorities did not have to issue unlimited State guarantees, neither for bank deposits nor for the banks’ other borrowings or lendings. According to a recently published OECD report* on the subject of measures introduced during the financial crisis, Norway was the only EU/EEA country in which it was not necessary to issue State guarantees for borrowings or lendings or to expand the deposit guarantee coverage.

It is a matter of great importance to Norway that we retain our deposit guarantee scheme. I would therefore ask that the Commission accept an adaption text in connection with the relevant processes involved in any incorporation of Directive 2009/14/EC in the EEA Agreement, enabling Norway to retain the deposit guarantee coverage of NOK 2 million per depositor per bank, combined with export-ban and continued access to topping-up and.

2. The situation with regard to competition
The letter of 1 October 2009 from former Commissioner McCreevy argues that a level of coverage (in Norway) for deposits that is considerably higher than in neighbouring countries, will lead to significant competitive distortion. As was noted above, Norway has applied a deposit cover of NOK 2 million per depositor per bank (€ 250 000) since 1996, while the other Nordic countries have maintained coverage of € 20 000 per depositor per bank (until the level was increased to € 50 000 on 1 July 2009). In other words, until quite recently, the divergence between the levels of coverage was even greater than the difference that will exist after 31 December 2010, without this difference in coverage having resulted in competitive distortion. Even though Sweden and Denmark support the harmonisation of regulations within the European Union in this area, the Danish and Swedish ministers of finance have expressly assured us in letters that in their experience the difference in coverage has not resulted in competitive distortions in the period since 1996.  Moreover, no state or bank has claimed that any such competitive distortion exists, or has existed in the past, as a consequence of the Norwegian deposit guarantee scheme.

I also wish to stress that notwithstanding the higher level of deposit guarantee coverage provided in Norway than in neighbouring countries, Norway saw no inward flow of capital from our neighbours during the financial crisis. Nor did Norway register any flight of capital to banks in countries offering unlimited guarantees for deposits. This demonstrates that the Norwegian scheme is well-balanced and that it does not undermine the European financial safety net framework.

Against this background, Norway is of the view that an exemption for the Norwegian scheme would not lead to competitive distortion on the Nordic or European markets for banking services, and nor would such an exemption have an impact on the financial stability of the internal market. In order to ensure that this continues to be the case, Norway is prepared to keep the topping-up and have an export-ban measure in place.

3. Topping-up and export-ban measures
Norway is prepared to combine an exemption for the Norwegian scheme with topping-up and export-ban measures. The letter from Mr McCreevy of 1 October 2009 argues that topping up is accompanied by certain disadvantages for the host state. These disadvantages relate to the fact that the host state bears a large portion of the costs in the event of a failure, whereas it has no supervisory responsibilities over the branch or any involvement in the winding-up.

The Commission’s arguments on the subject of topping-up as presented in the letter are arguments against topping-up in general and the disadvantages to the host state of topping-up. No case has been made that topping-up does not represent an appropriate  means of removing any possible competitive disadvantages for foreign banks that might be associated with the Norwegian guarantee deposit scheme. Moreover, Norway is willing to shoulder the disadvantages (for Norway, as the host state) related to the continued availability of topping-up membership.

As regards the export-ban measure, Norway’s point of departure is that we are prepared to accept the Commission’s formulation of such a ban. I refer here to the fact that the Deposit Guarantee Schemes Directive already includes a provision on export-bans, which expired on 31 December 1999. Nevertheless, I am favourably disposed towards the reintroduction of a revised form (wording) of this provision, should the Commission so wish.

4. Lessons learned from the financial crisis
I would also note that nothing has come to light during the financial crisis as regards the deposit guarantee scheme to indicate that minimum regulation of the level of coverage does not work. The financial crisis simply revealed that the minimum EU-requirement as to coverage, which prior to the crisis was € 20 000, was too low. The financial crisis also demonstrated that one of the consequences of a weak guarantee scheme is that in a crisis, countries are forced to issue unlimited State guarantees in order to prevent a run on the banks. This type of measure can also serve to amplify the turbulence surrounding a crisis. It can also play a part in undermining confidence in a country’s own banks in the wake of a crisis.

Accordingly, one experience from the crisis is that in order to safeguard safe and calm conditions for the banks, it is important that the deposit guarantee scheme operated in the individual countries should be sufficiently robust – and the level of coverage sufficiently high – for depositors in the country in question to be confident that their deposits are safe. Bank deposits represent an important means for households to invest their savings and it is vital for the financial stability of a country that depositors should feel that such funds are secure. The financial crisis demonstrated that the Norwegian scheme was the only scheme in the EEA that was sufficiently robust for the State not to have to issue guarantees for borrowings or lendings or expand the deposit guaranteed, ref. the recently published OECD report.

5. Conclusion
Mr McCreevy’s letter contended that explaining the reduction in the Norwegian guarantee deposit scheme to Norwegian consumers would be a straightforward matter. You also note in your letter of 26 April 2010, as did Mr McCreevy in his letter, that average deposits in Norway are considerably lower than € 100 000, and you go on to draw the conclusion that “the change would have a limited impact on effective deposit protection in Norway”. This is not the case. In Norway, some 7,5 million bank accounts contain deposits of a type encompassed by the deposit guarantee scheme (eligible deposits). If a depositor has multiple accounts in the same bank, these are regarded as constituting a single account. The population of Norway is 4,9 million people**.   Accordingly, in Norway the use of bank deposits and the holding of accounts in multiple banks are widespread. More or less all Norwegians have accounts in one or more banks. This is true irrespective of age, and it is also the case for children of all ages. Therefore, of course, the average deposit on eligible bank accounts is “low”.

However, what is essential to note, when comparing the relative situation for Norway to the European Union, is the following fact: The total amount of eligible deposits covered by the guarantee scheme as a percentage of the total amount of eligible deposits is much lower in Norway than in the EU. In Norway, only 47 per cent of eligible deposits would be covered (guaranteed) by a guarantee scheme covering deposits up to € 100 000. This is a very much lower proportion than in the EU.

Explaining a reduction in the Norwegian guarantee deposit scheme of no less than 60 per cent (from € 250 000 to € 100 000) to Norwegian consumers would be very difficult and complicated. Norwegian consumers are very aware of the actual terms afforded under the Norwegian scheme, and this scheme is widely credited with having been one of the main reasons that Norway came through the financial crisis safely. There would be strong reactions in Norway if the EU’s work to strengthen the deposit guarantee scheme in the EU (the EEA) should lead to a significant weakening in the arrangement in force in a single country (Norway). Moreover, one result of the crisis now seen in certain European Union countries has been that Norwegian authorities again have had to remind the public of the existence of the Norwegian deposit guarantee scheme.

This is a matter of very great importance to Norway. I would therefore ask that the Commission accept an adaptation text in connection with the relevant processes involved in incorporating Directive 2009/14/EC in the EEA Agreement, to enable Norway to retain the deposit guarantee cover of NOK 2 million kroner per depositor per bank combined with the continued use of topping-up and export-ban measures.

We are at your disposal should further clarification or amplification of this matter be desirable or necessary. Both our officials and members of the Government will be available for meetings in Brussels on this matter.

Yours sincerely,

Sigbjørn Johnsen


*Financial Market Trends No. 97 (2/2009), Expanded Guarantees for Banks: Benefits, Cost and Exit Issues, page 18. See www.oecd.org
**Source: Figures as at 1.1.2010