Posted by: Dirk | September 28, 2008

Bank deposit insurance in Germany

The Einlagensicherungsfonds is the German bank deposit insurance scheme maintained by the Bankenverband. The statutes are quite interesting. §6 (10) on p.12 concerns ordinary clients of failed banks in Germany, like those of Lehman Brothers in Germany:

10. Ein Rechtsanspruch auf ein Eingreifen oder auf Leistungen des Einlagensicherungsfonds besteht nicht.

This says there is no legal title on the bank deposit insurance. This has always seemed to be a minor point, since German banks have been safe and secure places in the last 50 years. But, with the US banking system failing, should we reevaluate this minor point?

The answer is certainly yes. Financial markets are global, and the failure of IKB showed how banks and financial markets are interdependent. A lot of German (and European) banks have lost money in the US financial crisis. The banks themselves seem to be irritated, so irritated that they report the rate at which they lend money to each other (the LIBOR, see my last post). There seems to be a certain level of stress in the system, and the ECB has injected liquidity into the system more than once in the last months. Since the banks don’t seem to trust each other with the LIBOR , plus the LIBOR itself is already quite high (see below), it is difficult to make anything more than an informed guess. I am not doing that, but I want to point out that the  Einlagensicherungsfonds will only fail if the big German banks break down together. That would still leave room for a bail-out by the government, but hopefully we will not have to think about this.

UPDATE 07/10/2008: The German government guarantees for all money in the banks. Ireland did the same, but that only makes two ridiculous proposals. The government does not have the money to fulfill its promise. This kind of policy-making is potentially damaging. Coordinated action is needed.

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