Deposit Guarantee — Definition Explained Simply | Examples & Role
The Deposit Guarantee Scheme is a public and private protection mechanism that safeguards customers’ funds in the event of a bank’s insolvency. It guarantees the repayment of deposits up to a legally defined limit and plays an essential role in maintaining financial stability.
The Deposit Guarantee Scheme (Einlagensicherung) protects the savings of bank customers. If a bank becomes insolvent, depositors are compensated up to a specified amount. In Germany, deposit protection is regulated by the Deposit Guarantee Act (Einlagensicherungsgesetz – EinSiG) and is part of the pan-European EU Deposit Guarantee Scheme.
Under EU law, every member state must ensure protection of deposits held by individuals and legal entities up to at least €100,000 per depositor and per bank. In Germany, in addition to the mandatory system, there are also voluntary deposit protection funds established by banking associations, which provide additional coverage beyond this threshold.
The main objective of the scheme is to maintain confidence in the banking system and to prevent depositor panic. It reduces the risk of mass withdrawals (“bank runs”) and contributes to overall financial stability. The deposit guarantee system is one of the key components of consumer protection in the financial sector of Germany and the European Union.
Main components of the deposit guarantee system in Germany
- Statutory deposit protection. Ensures protection of deposits up to €100,000 per customer in each bank. Managed by officially recognized compensation institutions (Entschädigungseinrichtungen), such as the Entschädigungseinrichtung deutscher Banken GmbH (EdB).
- Voluntary deposit protection. Additional coverage provided by certain banking associations (e.g., Deposit Protection Fund of the Association of German Banks). Since 2023, the protection limit has been up to €5 million for private clients and up to €50 million for companies.
- Supervision and oversight. The operation of deposit guarantee systems is monitored by the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank.
Which deposits are protected
The following types of deposits are covered:
- Demand deposits (current and payment accounts).
- Savings and term deposits (including fixed-term deposits).
- Deposits of individuals and legal entities, including small and medium-sized enterprises.
How the deposit guarantee scheme works
- If a bank becomes insolvent, BaFin officially declares the compensation event.
- The deposit guarantee scheme automatically initiates the compensation process.
- Depositors receive their money back within seven business days.
- Compensation is paid in euros, even if the original deposit was held in another currency (for example, US dollars).