The deposit protection scheme
To create as much security as possible for depositors of banks in the European Union, the European Commission crafted a directive for bank failures.
Since its inception many banks in the European Union have successfully used the DGS directive and their domestic deposit protection scheme to secure and pay out the insured deposits. Currently there are banks in Latvia, Cyprus and Malta that are in difficulties. For customers of FBME Bank in Cyprus the DGS was activated the 18th of April 2016 and FBME Cyprus customers receive up to 100.000 Euro from the deposit guarantee scheme.
The DGS is an external insurance. Participating banks pay a premium based on the deposits the hold on behalf of their customers and a risk based pricing model. High risk banks have a different business model or a small number of business units. The idea that a bank can be shut down because is engages in business with specific countries is outdated. There is legislation in Europe and a proper legal system covers a potential misusage of power by governments.