A Deposit Guarantee Scheme (DGS) is a system designed to protect depositors and provide insurance for their funds held in banks or financial institutions. It is a safety net that ensures a certain level of protection for individuals and businesses in case of bank failures or insolvency.

In the European Union (EU), each member state has its own DGS, and they are typically established and regulated by national authorities in accordance with EU directives. The EU legislation sets out certain minimum requirements and standards that member states must adhere to in order to provide effective deposit protection. These standards are aimed at harmonizing the level of protection across EU countries.

The key features of the EU Deposit Guarantee Scheme are as follows:

• Coverage Limit: The EU legislation establishes a coverage limit of €100,000 (or equivalent in national currency) per depositor, per credit institution. This means that if a bank fails, each depositor is protected up to €100,000 of their deposited funds. It's important to note that this limit applies to the combined total of all deposits held by the depositor in the same credit institution.
• Broad Scope: The DGS covers various types of deposits, including sight/demand deposits (current accounts), savings deposits, and fixed-term deposits. The coverage extends to individuals, companies, small businesses, and non-profit organizations.
• Automatic Protection: Deposit protection is typically provided automatically and free of charge. Depositors do not need to take any action or pay any fees to benefit from the DGS. The protection is applied as a safeguard in the event of a bank failure.
• Prompt Payouts: In the case of a bank failure, the DGS aims to provide prompt payouts to depositors. The legislation requires member states to ensure that depositors receive their protected funds within a specified time frame, typically within 7 to 20 working days.

It's important to understand that the DGS only covers deposits and not other financial products such as investments in stocks, bonds, or insurance policies. Additionally, subordinated deposits, structured products, and investment deposits which are considered higher-risk instruments, are generally not covered by the DGS.

The EU legislation on deposit protection aims to promote confidence in the banking system and safeguard the interests of depositors by providing a level of security for their funds. By establishing consistent standards and coverage limits across member states, the legislation ensures a minimum level of deposit protection throughout the EU.

The law requires banks to disclose information about DGS eligibility for their products. Look for this information on the websites of banks.

Read more about deposit guarantee schemes here.