Association for the Guarantee of Deposits Luxembourg

Given the failure of Kaupthing Bank Luxembourg on October 9, 2008, along with increased deposit guarantees in other countries, on October 17, 2008, Luxembourgish authorities announced plans to increase the deposit-guarantee cap to EUR 100,000 (Grand Duchy of Luxembourg 2008; Wintersteller 2013). Luxembourg’s Chamber of Deputies adopted this change on December 19, 2008, with the goal of reassuring depositors and competing with international peers (Law of 19 December 2010; Grand Duchy of Luxembourg 2008). The changes to the deposit insurance came into effect on January 1, 2009. The operational date was chosen so as not to cover the failures of three Icelandic subsidiaries, which had occurred in 2008.

In addition to the changes to the Association Pour la Garantie des Dépôts (AGDL), on September 30, 2008, the Luxembourgish government also legislated a guarantee of Dexia, in conjunction with Belgian, French, and Dutch authorities (Law of 19 December 2010; Mayer Brown 2009; Wiggins, Tente, and Metrick 2019). The guarantee covered EUR 4.5 billion, including Dexia’s liabilities toward credit and institutional counterparts, its bonds, and its debt securities. For more on Dexia’s guarantee, see Wiggins, Tente, and Metrick 2019. Recapitalizations of Dexia and Fortis Bank also occurred in September and October 2008, in conjunction with France, Belgium, and the Netherlands (Petrovic and Tutsch 2009). The European Central Bank (ECB) and the Luxembourg Central Bank adopted more extensive liquidity measures to help the Luxembourgish economy (Mayer Brown 2009; IMF 2010).

On October 17, 2008, minister of the treasury and budget Luc Frieden announced that the government would propose legislation to increase Luxembourg’s deposit-insurance coverage to EUR 100,000 (Grand Duchy of Luxembourg 2008). The legislature approved the change with the Law of 19 December 2008. This law became operational on January 1, 2009.

Prior to the GFC, Luxembourgish law allowed for, but did not require, a co-insurance scheme, in which 90% or more of deposits were guaranteed, so long as the amount guaranteed summed to EUR 20,000 (Law of 5 April 1993, Article 62-2). The Law of 19 December 2008 did not mention co-insurance, effectively eliminating it as an option. Later, Directive 2009/14/EC required EU member states to eliminate co-insurance, and Luxembourg’s legislature ultimately repealed it with the Law of 18 December 2015 (Law of 18 December 2015, Article 154; EP/EC 2009).

Luxembourgish law established the AGDL as an independent legal entity (AGDL 2003). The AGDL was privately administered (Garcia 2009).

Members of the AGDL would meet at least once each year. Each year, members of the AGDL-insured institutions reported the total amount of guaranteed deposits.

The board of directors administered the AGDL. The board of directors was comprised of 11 to 15 members, all of whom represented the private sector and served two-year terms (AGDL 2003; Garcia 2009). A chairman and vice-chairman oversaw the AGDL, both selected by the board of directors. The board of directors managed the ADGL, convened meetings, and implemented its decisions. The board of directors’ decisions were taken by a majority vote, according to the AGDL’s procedures and internal rules.

The AGDL was subject to public regulation. Luxembourg’s legislature set its deposit-insurance cap and the Commission for the Supervision of the Financial Sector, Luxembourg’s prudential supervisor, determined which institutions were eligible to operate in Luxembourg (Law of 19 December 2010; AGDL 2003).

On October 17, 2008, following the failure of Kaupthing Bank Luxembourg, Frieden announced that the government would propose legislation to increase the deposit-insurance cap to EUR 100,000. Frieden stressed that this increase was meant to match countries that had increased their deposit guarantees and that such an increase was meant to comply with EU recommendations (Grand Duchy of Luxembourg 2008; EC 2008). Frieden also said that the measure was purely theoretical for most banks in Luxembourg. This was the case, Frieden argued, because Luxembourg had recapitalized its major banks. Furthermore, Frieden stated that the increased coverage would not be retroactively applied to the depositors of Kaupthing Bank Luxembourg.

The AGDL communicated with depositors through various media, including press conferences and the AGDL website, which included information pertinent to depositors who held accounts with failed institutions (AGDL 2008a; AGDL n.d.a; AGDL n.d.b).

Prior to its modification in 2008, Luxembourg’s deposit-insurance system covered a maximum of EUR 20,000 (AGDL 2003). Luxembourgish law allowed for, but did not require, a co-insurance scheme, which covered 90% of an account’s value up to EUR 22,222, with depositors responsible for the remaining 10% (Schich 2009; Demirgüç-Kunt, Kane, and Laeven 2014; Law of 5 April 1993, Article 62-2). The legislation adopted on December 19, 2008, increased Luxembourg’s deposit-insurance coverage to EUR 100,000 and eliminated co-insurance. These changes came into effect on January 1, 2009.

In 2010, scholars reported that the AGDL covered USD 18.3 billion (Demirgüç-Kunt, Kane, and Laeven 2014). These funds were guaranteed without the presence of a standing deposit-insurance fund.

Given that the AGDL was an ex-post deposit-insurance scheme, there were no up-front fees for member institutions (IMF 2009). AGDL-insured institutions only paid fees once the AGDL was activated, covering for the failed institution.

In the GFC, AGDL-institutions were required to pay EUR 310 million in fees, given the failure of three Icelandic subsidiaries (Wintersteller 2013). The IMF, however, reported that AGDL-institutions had amassed EUR 828 million in provisions for such failures (IMF 2010). Luxembourgish law allowed AGDL-insured institutions to set aside up to 10% of their guaranteed deposits as special, tax-exempt provisions (Grand-Ducal Regulation of 21 December 1991). It is unclear, though, whether the Luxembourgish government provided the AGDL with guidance in the GFC.

Following changes to the Luxembourgish deposit-insurance system, the Fonds de Garantie des Dépôts Luxembourg (FGDL) aimed to have a deposit-insurance fund equivalent to 1.6% of covered deposits (IMF MCMD 2017).

All institutions registered with Luxembourg’s Commission for the Supervision of the Financial Sector were automatically members of the AGDL (AGDL 2003). This included foreign-bank branches of Luxembourgish institutions. Foreign-bank branches operating in Luxembourg were eligible for supplemental coverage if their coverage was less than that provided by the AGDL.

The AGDL also implemented a separate guarantee on investment instruments, covering all investment firms registered with the Commission for the Supervision on the Financial Sector.

The AGDL covered “all cash deposits” made by depositors in member institutions (AGDL 2003). These included liabilities to credit institutions, savings deposits, time liabilities, and other types of accounts. The AGDL also covered foreign-currency deposits.

Some deposits were not included in the AGDL’s guarantee. These included financial instruments like those held by deposits of insurance companies, states, credit institutions, and investment funds. The AGDL also did not cover the deposits of its board of directors and their families.

The AGDL’s separate guarantee for investment firms covered instruments like securities and money-market instruments. This guarantee excluded several types of investment accounts, such as those held by investment companies, credit institutions, and other entities.

As an ex-post deposit-insurance scheme, the AGDL levied no up-front fees (IMF 2009). Instead, banks only paid fees after the AGDL’s guarantee was triggered by a bank failure. The AGDL’s statutes set out that, in the event of a failure, each member would pay proportionally to the amount of the institution’s AGDL-insured deposits on December 31 of the prior year divided by the total amount of deposits guaranteed by the AGDL on December 31 (AGDL 2003). The AGDL stipulated that ex-post fees could not exceed 5% of an institution’s shareholder equity. The board of directors could instruct institutions to pay these ex-post fees in advance, prior to the exact amount of depositor payouts being determined. When the AGDL was reimbursed, member institutions would be reimbursed on a prorated basis.

In the GFC, Luxembourgish institutions compiled EUR 828 million in provisions for bank failures (IMF 2010). It is unclear whether the Luxembourgish government provided the AGDL with guidance in the GFC. Bank establishments could set aside up to 10% of their guaranteed deposits as special, tax-exempt provisions (Grand-Ducal Regulation of 21 December 1991).

The FGDL, which was established in 2015 and replaced the AGDL, received ex-ante, risk-based fees from banks (IMF MCMD 2017). Banks could also be subject to extraordinary fees.

Pursuant to Luxembourgish law, the AGDL could be activated for two reasons. First, if the Commission for the Supervision of the Financial Sector determined that a member institution would be unable to repay its cash deposits at that time or in the near future (AGDL 2003). Second, if a Luxembourgish court suspended an institution’s ability to take and redeem deposits. The AGDL would then pay out depositors, which could take up to three months. In exceptional circumstances, the AGDL could request up to three extensions, none exceeding three months. The AGDL required liquidators or legal representatives to verify depositor claims. The AGDL was granted subrogation against a failed institution.

There were no additional conditions associated with the changes to the Luxembourgish scheme.

The 2008 changes to the deposit-insurance system were adopted as permanent changes, without a sunset date (Law of 19 December 2010). As of February 2022, Luxembourg continued to cover EUR 100,000 (FGDL n.d.).

During the GFC, Luxembourgish authorities prepared revisions to the scheme, including altering the scheme to an ex-ante funding method and making the scheme publicly owned (IMF 2009). By 2011, a draft law had been completed, though Luxembourgish officials awaited the issuance of an EU directive on deposit insurance (IMF 2011). The EU released its directive in April 2014, and Luxembourgish officials made the aforementioned changes on December 18, 2015 (EP/EC 2014). This created the FGDL to administer Luxembourg’s deposit guarantee (FGDL n.d.; Law of 18 December 2015, Article 154).