Banking & Finance

The protection of depositors in the event of a bank failure: the liability of financial supervisory authorities and deposit-guarantee schemes

28 May 2014

19 min read

The European legislator has always been aware of the crucial importance of financial stability and of maintaining a high level of confidence in the financial markets. In order to achieve these objectives, a number of directives have been adopted in the past 40 years aimed at preventing financial risks through the establishment of supervisory institutions and the gradual strengthening of their powers. However, it has proved not to be sufficient: bank failures still do happen, causing serious negative consequences not only on depositors’ personal level – they become unable to recover their savings – but also on a general level, since the solidity of the financial sector will appear undermined. With a view to limit such risks, deposit-guarantee schemes have been created and are being constantly improved.

Directive 94/19/EC on deposit-guarantee schemes

In 1994, the European Parliament and Council adopted the Directive 94/19/EC on deposit-guarantee schemes, with a view to enhancing the depositor’s protection. The directive required that Member States ensure the creation of deposit-guarantee schemes (Article 1) and imposed on supervisory authorities a series of duties such as verifying that the banks adhering to the scheme comply with their obligations, adopting prudential measures for ensuring such compliance and, in the most serious cases, revoking the authorisation to exercise banking activity (article 3). The Directive fixed at €20,000 the limit to the sums which can be claimed by depositors from insolvent banks adhering to such scheme (Article 7).

At least one deposit-guarantee scheme has been created by each Member State. In Malta, Directive 94/19/EC was implemented by Legal Notice 369 of 2003, under which the “Depositor Compensation Scheme” was established. Such scheme is defined as “a rescue fund for depositors of failed banks which are licensed by the Malta Financial Services Authority (MFSA)”. Such scheme shall “pay compensation if a bank is unable to meet its obligations towards depositors or has otherwise suspended payment[1].. The Scheme covers deposits made with all credit institutions incorporated and licensed in Malta, including their branches operating in another EEA State, and, in some cases, those made with branches of credit institutions operating in Malta but licensed in another EEA state or in a non-EEA state. The updated list of the banks participating in the Depositor Compensation Scheme can be found here.

Unfortunately, Directive 94/19/EC “has proved not to be adequate for a large number of deposits in the Community”[2]: the amount recoverable by depositors through the deposit-guarantee schemes was often insufficient and some unsatisfied depositors have followed suit against the financial supervisory authority of their country, seeking compensation for their losses, which – they argued – were caused by the authority’s defective supervision over the insolvent bank. Here below, we will examine some relevant cases, starting from the European Court of Justice’s decision Peter Paul and others v. Bundesrepublik Deutschland[3].

ECJ, Peter Paul and others v. Germany

The issue of financial supervisory authorities’ liability vis-à-vis depositors has been dealt with by the European Court of Justice in the Peter Paul and others v. Bundesrepublik Deutschland case.

In 1987, the BVH Bank received authorisation to engage in banking transactions from the Bundesaufsichtsamt für das Kreditwesen (Federal office for the supervision of credit institutions, i.e. the German financial supervisory authority), but was not a member of a deposit-guarantee scheme. From 1987 to 1992, the bank has applied unsuccessfully for admission to a deposit-guarantee scheme, but it was refused because some of the required conditions were not fulfilled.

During the 1990s the bank has experienced financial problems. Over those years, the supervisory authority has made several examinations of the bank’s affairs and eventually filed a bankruptcy petition and revoked the bank’s authorisation to engage in banking transactions in 1997.

Following this event, the claimants, who had opened term deposit accounts with the BVH Bank between 1993 and 1995, were not able to recover the sums deposited on their accounts.

Therefore, they brought proceedings against the Federal Republic of Germany seeking compensation for the losses of their deposit, arguing that:

  1. if the State had transposed directive 94/19/EC in a timely manner, a deposit-guarantee scheme would have existed by 1997 from which each claimant would have been able to recover a sum of up to €20,000, and
  2. they would not have suffered any loss if the supervisory authority had correctly supervised the bank’s activity. Therefore, the State should be held liable under § 839(1) BGB[4] and art. 34 GG for “negligent breach of official duty” committed by an official (the financial supervisory authority), where the “official duty” consisted in the obligations – imposed on Member States by art. 3 of the Directive – to monitor the fulfilment by the banks of the conditions required for their authorisation to engage in financial transactions, to take the necessary measures in case of non-fulfilment and, in the last instance, to revoke the authorisation.

For these reasons, they claimed that the State should be condemned to pay to each depositor:

  1. the equivalent of the sum which they had deposited and that cannot be recovered from the bank, up to the limit of €20,000, as a compensation for the belated transposition, and
  2. in respect of the pecuniary loss exceeding €20,000, the entirety of the amount lost.

At first instance, the judges condemned the State to compensate each claimant for their losses on the grounds of the belated transposition.

On the contrary, they rejected the second claim. They affirmed that, under German law, liability for breach of official duty is incurred in the event of a breach of “official duty… as against a third party”, that is, “a duty which exists in any case as against the injured party”[5]. However, they held that no breach of official duty had been committed by financial supervisory authority, since, according to § 6(4) of the KWG (i.e. Kreditwesengesetz, the Law on Credit Institutions), it “exercises the functions assigned to it only in the public interest”[6].

The claimants filed an appeal before the Bundesgerichtshof (Federal Court of Justice), which decided to stay proceedings and to refer to the European Court of Justice three questions for a preliminary ruling, which will be analysed successively.

Does directive 94/19/EC confer an individual right on depositors to require that the supervisory authorities adopt supervisory measures in their interest?

The first question is whether or not directive 94/19/EC confers on depositors the right to require that the financial supervisory authority takes the supervisory measures described in articles 3(2) to 5 in the depositors’ interest.

The ECJ agrees with the Commission and the governments which submitted observations to the Court that the said provisions must be interpreted as conferring on depositors a right to compensation in the event of insolvency of the bank, but not a right to have the competent authorities take supervisory measures in their interest.

Moreover, this interpretation is supported by Recital 24 in the preamble of the directive, which explicitly affirms that neither the Member States nor the supervisory authorities can incur liability in respect of depositors if they have ensured that one or more deposit-guarantee schemes have been introduced and officially recognized.

Therefore, the Court held that the directive does not confer on depositors the right to have the supervisory authority take measures in their interest. Thus, Member States can legislate that the financial supervisory authorities shall operate in the public interest, even when, according to national laws, this results in an exclusion of the State’s or supervisory authority’s liability vis-à-vis depositors for the losses they suffered as a consequence of a defective supervision.

Do the provisions of the directives harmonising the law on the prudential supervision of banks confer an individual right on depositors to require that the supervisory authorities adopt supervisory measures in their interest?

The second question submitted to the ECJ was whether some provisions contained in other directives harmonising the law on the prudential supervision of banks (Directives 77/780, 89/299 and 89/646) do confer such right, therefore precluding to national legislators the possibility to require that the supervisory authority exercises its functions only in the public interest.

The provisions referred to are contained in some recitals in the preambles of several directives and state “in a general manner that one of the objectives of the planned harmonisation is to protect depositors”[7].

However, the ECJ points out that the protection of depositors is merely one of the objectives of these directives, but they do not explicitly grant rights to depositors.

Secondly, the harmonisation is restricted to what is “essential, necessary and sufficient to secure the mutual recognition of authorisations and of prudential supervision systems”[8], but it is not the case here: the coordination of national rules on the liability of national supervisory authorities in case of defective supervision “does not appear to be necessary”[9].

Thirdly, in a number of Member States, the national legislation does not admit that the supervisory authority can incur liability vis-à-vis individuals in case of defective supervision. The reasons invoked for such choice are the complexity of banking supervision and the necessity to protect a plurality of interests, and in particular the stability of the financial system[10].

Fourthly, when adopting Directive 94/19/EC, the Community decided to introduce only a “minimal protection of depositors” in the event that their deposits are unavailable, including when such event has been caused by a defective supervision by the competent authority[11].

In the light of the above, the ECJ ruled that directives 77/780, 89/646 and 89/299 do not confer an individual right on depositors to require the competent authorities to adopt prudential supervisory measures in the depositors’ interest. Member States are therefore allowed to establish that their financial supervisory authority acts exclusively in the public interest, thus precluding individuals from claiming compensation for damage resulting from defective supervision on the part of the authority[12].

Can the State be held liable vis-à-vis depositors?

The third issue is whether or not the State can be held liable in accordance with the principles of Community law vis-à-vis third parties if its national supervisory authority has not carried out its supervision correctly.

The ECJ refers to its cases Brasserie du Pêcheur and Factortame, where it was stated that a State can incur liability for breach of Community law only if the rule infringed is intended to confer rights on individuals.

However, the Court made it clear that neither Directive 94/19 nor directives 77/80, 89/299 and 89/646 do confer on depositors any right capable of giving rise to liability on the part of the State on the basis of Community law.

To summarise, the European Court of Justice stated that, under European law, depositors have no right to claim damages neither from the State nor from the financial supervisory authority, even when the bank’s failure could have been prevented with a more attentive supervision. However, each Member State can decide to grant such right to depositors in order to better protect them.

The solutions adopted within the EU are not uniform: while some States have introduced a statutory immunity, some others prefer to strengthen the protection of depositors by letting them seek compensation from neglectful supervisory authorities under tort law.

By way of example, we will analyse the solutions held in Germany, the UK, France, Malta and Italy.

The different Member States’ solutions: immunity v. liability

Germany: liability totally excluded

The possibility of holding the supervisory authority liable vis-à-vis depositors is completely excluded in Germany. Article 839 of the BGB provides that a tort of “breach of official duty” is committed when an official breaches a legal provision intentionally or negligently and his conduct causes damage to an individual. Such individual can seek compensation from the State or from the body to which the official pertains only if the breached provision specifically protects the interests of that category of individuals. However, with regard to the financial supervisory authority, article 6(4) of the KWG expressly states that such authority exercises its functions “only in the public interest”, not in the interest of depositors. Hence, depositors cannot obtain compensation from the supervisory authority under German law.

  • France, UK and Malta: liability only in exceptional cases

Some Member States have adopted a more balanced position: although no total immunity is granted to the financial supervisory authorities, they can be held liable only in exceptional cases.

In France, the Conseil d’État’s traditional position was to hold the State liable vis-à-vis clients of an insolvent bank when the national supervisory authority (the Commission bancaire, which has no legal personality) had committed a gross negligence (faute lourde)[13] when exercicing its supervisory functions.

An opening to a broader protection of investors’ right has been attempted by the Paris Administrative Court of Appeal in its decisions El Shikh[14] and Kechichian[15]. The judges affirmed that the Commission bancaire could be liable even if a mere “faute simple” had been committed.

In the first case the liability was eventually excluded because the existence of a link of causality between the supervisory authority’s omission and the insolvency of the bank could not be proved.  In the Kerchikian case, the Commission bancaire was held partially liable and condemned to pay 20% of the investors’ losses. Nonetheless, the decision was annulled by the Conseil d’État, reaffirming its consolidated principle that the supervisory authority’s liability can be held only if a gross negligence has been committed.

In the UK, the Banking Act 1987 introduced an almost-total immunity from damages liability for the British banking supervisory authority[16]. In fact, Section 1(4) stated that “Neither the Bank nor any person who is a member of its Court of Directors or who is, or is acting as, an officer or servant of the Bank shall be liable in damages for anything done or omitted in the discharge or purported discharge of the functions of the Bank under this Act unless it is shown that the act or omission was in bad faith”[17], that is when such act or omission constitutes a tort of misfeasance in public office.

Following the collapse of the Bank of Credit and Commerce International S.A. (BCCI), some depositors brought action for damages against the Bank of England (Three Rivers District Council and others v. Governor and Company of the Bank of England[18]). They argued that some Bank of England senior officials had acted in bad faith when granting the BCCI a licence and subsequently shuttering their eyes to the fraud perpetrated by the bank’s managers, failing to revoke the bank’s licence when it was clear that such measure was necessary. Two questions of law were submitted to the House of Lords.

The first question concerned the definition of the “precise ingredients” of the tort of misfeasance in public office. In particular, it was not clear which states of mind did fall under the notion of “bad faith”. A broad definition has been adopted, including both the case in which the public officer misuses his powers with the specific intention to injure an individual or a class of individuals (targeted malice) and the case in which he acts consciously beyond his powers or in a way which he knows is inconsistent with his duties and being aware that his acts could possibly injure somebody (untargeted malice).

The second question of law was whether depositors were entitled to seek compensation from the Bank of England for violation of the provisions of Directive 77/780/EEC. The plaintiffs argued that the Bank of England’s officials, by not properly supervising the BCCI’s activity, had breached the provisions of Directive 77/780/EEC on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions. Such directive listed a series of requirements that any bank must comply with in order to be granted – and maintain – a banking license within the Community. However, the directive did not impose on the competent authorities in each Member State neither specific duties of supervision nor an obligation to withdraw a licence in the depositors’ interest. In other words, the Directive did not contain any provision which entailed the granting of rights to depositors, which is one of the conditions required by the CJEU for giving rise to a right on the part of individuals to obtain reparation (Francovich and others v. Italian Republic). As a consequence, as stated by Lord Hope in the leading opinion, depositors are not entitled to claim damages from the Bank of England for the losses they have suffered as a consequence of its defective supervision.

In Malta, article 29 of the Malta Financial Services Act (Chapter 330 of the Laws of Malta) states that both the Malta Financial Services Authority and its employees “shall not be liable in damages for anything done or omitted to be done in the discharge or purported discharge of any function under this Act or any other Act administered by the Authority, or otherwise in the exercise of their official duties, unless the act or omission is shown to have been done or omitted to be done, as the case may be, in bad faith”.

To date, no depositor has ever brought an action for damages against the MFSA.

Italy: tort liability admitted

In a 2011 decision[19], the Corte di Cassazione dealt with the issue of the liability of the Italian financial supervisory authority, the Commissione Nazionale per le Società e la Borsa (Consob) vis-à-vis third parties who suffered losses as a consequence of the authority’s defective supervision. It is important to note that in this case the supervisee was a financial intermediary but it is reasonable to think that an identical decision would be pronounced in the case the supervisee was a bank.

Following the Società Servizi Finanziari Amministrativi (SFA) bankruptcy, some investors brought action against the Consob seeking compensation of their damages pursuant to article 2043 cod. civ., that is the general provision on tort liability.

Both on first instance and on appeal the Consob was held liable. The Corte di Cassazione confirmed this solution by affirming that “the activity of the public administration, and in particular that of the Consob, a public entity whose functions consist in controlling and monitoring the securities market and the savings collection, shall be exercised within the limits and powers attributed by the laws which institute it as well as in respect of the principle of neminem laedere, in accordance with the principles of legality, impartiality and good administration provided by article 97 of the Constitution in correlation with article 47, first part; for this reason, the Consob is bound to the consequences fixed by article 2043 cod. civ. (…). The tort, for its own structure, follows the common rules of the civil code, including those concerning the personal fault, the link of causality, the damage and the quantification of the damage”[20]. The Consob has therefore been condemned to compensate the investors for the losses they suffered as a consequence of its defective supervision over the financial intermediary.

Directive 2009/14/EC

In order to solve the problems arising from the weak protection of depositors under Directive 94/19/EC, the European legislator adopted Directive 2009/14/EC, amending the previous one essentially on two points: the minimum coverage level of deposit-guarantee scheme has been increased from €20,000 to €100,000 and the payout delay reduced from three months to 20 working days.

The Directive has been implemented in all Member States. In Malta, this was done through  Legal Notice 227 of 2009, amending the Subsidiary Legislation 371.09 on Depositor Compensation Scheme Regulations. The set of rules currently in force can be found here.

New Directive on Deposit Guarantee Schemes to be adopted

The current depositors’ protection is not yet deemed fully satisfactory and the adoption of a new directive on Deposit-Guarantee Schemes (DGS) is already planned. On December 2013, the European Parliament and Member States have recently reached a political agreement on the new rules on Deposit-Guarantee Schemes. The coverage level will remain the same, but “access to the guaranteed amount will be easier and faster”: the payout delay will be gradually reduced from the current 20 working days to 7 working days in 2024. Moreover, “for the first time since the introduction of DGS in 1994, there are financing requirements for DGS in the Directive. In principle, the target level for ex ante funds of DGS is 0.8% of covered deposits to be collected from banks over a 10-year period” [21]. As observed by Commissioner Barnier, “these new rules will benefit all EU citizens: not only will their savings be better protected, but they will also have the choice of the best savings products available in any EU country without worrying about differences in the level of protection”[22].


Written by Speranza Puddu, Intern with GVZH Advocates, under supervision of Dr Andrew J. Zammit and Ms Sharon M Cilia Tortell.

[2] Recital 3 of Directive 2009/14/EC.

[3] Case C-222/02, Peter Paul and others v. Bundesrepublik Deutschland [2004] ECR I-9425.

[4] Article 839 of the BGB, entitled “Liability for breach of official duty”, defines such tort as follows: “(1 )If an official intentionally or negligently breaches the official duty incumbent upon him in relation to a third party, then he must compensate the third party for damage arising from this. If the official is only responsible because of negligence, then he may only be held liable if the injured person is not able to obtain compensation in another way.”

[5] Paragraph 17 of the decision.

[6] Ibid.

[7] Paragraph 38 of the decision.

[8] Paragraph 42 of the decision.

[9] Paragraph 43 of the decision.

[10] Paragraph 44 of the decision.

[11] Paragraph 46 of the decision.

[12] Paragraph 47 of the decision.

[13] E.g. CE, Sect., 2nd February 1960, Kampmann, AJDA 1960.I.46 chron. M. Combarnous et J.-M. Galabert; Sect, 28 June 1963, Bapst, AJDA 1963.I.47 chron. M. Gentot et J. Fourré; Sect., 13th June 1964, D’André, Rec. p. 329, RDP 1965 p. 65, note M. Waline.

[14] CAA Paris, 30th March 1999, El Shikh, AJDA 1999, p. 883, obs. MH.

[15] CAA Paris, 25th January 2000, Kechichian et autres, AJDA 2000, p. 136.

[16] From 1979 to 1998, the supervision of deposit-taking institutions has been carried out by the Bank of England. Following the Bank of England Act 1998, such functions have been assumed by the Financial Services Authority (FSA).

[17] An identical statutory immunity from damages liability benefits to the Financial Services Authority pursuant to Schedule 1, S. 19(1) of the Financial Services and Markets Act 2000.

[18] [2000] 2 WLR 1220.

[19] Cass. civ., sez. III, 23 March 2011, n° 6681.

[20] “L’attività della pubblica amministrazione ed in particolare della Consob deve svolgersi nei limiti e con l’esercizio dei poteri previsti dalle leggi speciali che la istituiscono,  ma anche dalla norma primaria del “neminem laedere”, in considerazione dei principi di legalità, imparzialità e buona amministrazione dettati dall’articolo 97 della Costituzione in correlazione con l’art. 47, prima parte, della Costituzione; pertanto la Consob è tenuta a subire le conseguenze stabilite dall’art. 2043 c.c. atteso che tali principi di garanzia si pongono come limiti esterni alla sua attività discrezionale, ancorché il sindacato di questa rimanga precluso al giudice ordinario. L’illecito civile, per la sua struttura, segue le comuni regole del codice civile anche per quanto concerne la cosiddetta imputabilità soggettiva, la causalità, l’evento di danno e la sua quantificazione.”

[22] Ibid.