What is a savings bond?

With a savings bond, you invest a specific sum for a certain period of time at pre-determined interest rates and with set interest payment dates. Your balance is available at the end of the term with no termination required. Although you cannot access the funds while the savings bond is maturing, you can use it as collateral, for example. Usually, a savings bond may not be terminated before the end of the investment term, or termination is possible but only at a loss of interest.

The interest rate of the savings bond can be staggered over time; the amount of the interest rate depends on the market interest rate, the time to maturity chosen by the saver and the credit institution offering the product.

You can arrange for the interest payments to be credited to the savings bond at the end of each year. This will enable you to profit from the compound interest effect, as the interest earned will yield further interest. Alternatively, you can arrange for your bank to credit the interest earned during the period to a specified reference account at year-end.

Savings bonds are available with or without a subordination agreement. Savings bonds with a subordination agreement sometimes come with a more lucrative interest rate.

Is there any kind of protection for the money invested in savings bonds?

If you invest in a savings bond without a subordination agreement, your money is protected in the event that the bank, savings bank or Bausparkasse becomes insolvent or has to be resolved. In this compensation event, the relevant statutory deposit guarantee scheme will provide compensation for your deposit – meaning both the money you invested and any interest credited – up to an amount of €100,000 within seven days.

Many private banks domiciled in Germany additionally join private deposit guarantee funds that commit to cover deposits beyond the statutory compensation up to certain maximum limits. Your bank can provide more information on whether a private deposit guarantee is in place and up to what amount. However, savers have no legal right to compensation of their deposits by these voluntary deposit guarantee funds. The respective institutions can provide more detailed information on how private deposit protection works.

The situation is different for savings bonds with a subordination agreement, which come with no legal right to compensation from statutory deposit guarantee schemes or private deposit guarantee funds in the event of a bank insolvency or resolution. Only after all non-subordinated creditors have received their money will savers with these bonds be compensated – if any money is left. If these bondholders have any outstanding debt with the bank (e.g. repayment of a loan), they must settle this debt. It is not possible to discharge part of the debt corresponding to the bond amount.

Institutional protection schemes for savings banks and cooperative banks

In addition to the statutory and voluntary protection schemes described above, credit unions (Volksbanken), agricultural credit cooperatives (Raiffeisenbanken), savings banks (Sparkassen), state banks (Landesbanken) and state building and loan associations (Landesbausparkassen) participate in institutional protection schemes (IPS). They use this tool to avert an insolvency or resolution in a timely manner, thereby avoiding a compensation event. All members of the IPS operated by the National Association of German Cooperative Banks (Bundesverband der Deutschen Volksbanken und Raiffeisenbanken – BVR) or the German Savings Banks Association (Deutscher Sparkassen- und Giroverband – DSGV) have committed to help and support each other as required. Where necessary, the respective banking network will step in to avert or rectify imminent or existing economic difficulties at the affiliated institutions. This mechanism indirectly provides comprehensive protection for customer deposits.

If a credit union or savings bank threatens to become insolvent, for instance, the banking network will typically solve the problem by restructuring the institution or merging it with another healthy member institution.

You can find out if a bank is a member of an IPS by enquiring with the bank itself or the respective IPS.

For which customers are savings bonds best suited?

Savings bonds are best suited for savers looking for a medium-term investment. Provided the savings bonds are covered by the deposit guarantee, they are a safe financial product for investors who do not wish to expose their assets to the risk of loss and for this reason prefer a conservative investment option as a means to accumulate and preserve wealth.

By agreeing a fixed interest rate, you know in advance how much interest income the investment can be expected to yield. If interest rates were to decline on the market, or if interest rates were even negative, you can still rely on the agreed interest rate until the term ends. Conversely: you would not be able to benefit from a significant rise in interest rates on the market. You would be contractually bound to the lower interest rates and there is no possibility of renegotiating interest rates that are in line with market rates.

Before investing in a savings bond, you should be quite certain that you will not require the money invested during the period to maturity. This is because a premature withdrawal of the savings would only be possible at the expense of interest income, or might even not be possible at all. It is possible, however, to pledge a savings bond as collateral on a loan.

Where can I take out a savings bond?

Information and advice can be obtained at the branches of the credit institutions, online or by telephone at the respective provider. This is also where you can sign the contract for your savings bond.

Give careful thought in advance to how long and for what purpose you intend to invest your money, and examine the offerings thoroughly. The interest rate can differ from institution to institution.

Usually no fees that reduce the interest profit are charged when purchasing a savings bond.

Do not allow yourself to be put under pressure, take time to examine the offers and to read the small print. Only sign the contract when you are sure that you have understood all the contractual provisions.

Are savings bonds subject to taxation?

The interest on the savings bond paid to you by the credit institution is subject to taxation. In order to benefit from tax-free allowances, you can apply for a tax exemption at your credit institution.

In what way are providers of savings bonds supervised?

Domestic banks require authorisation from BaFin for conducting deposit business. German banks are supervised by the Deutsche Bundesbank and BaFin and, if they exceed a certain size, also by the European Central Bank (ECB) within the scope of solvency supervision.

BaFin does not check whether the credit institutions are offering you favourable conditions for the savings bond. BaFin is also not responsible for checking the contractual provisions.

Customers of foreign banks or of banks which are not subject to supervision in Germany may experience certain restrictions. For example, complaints might only be accepted in the local language, or there may be different legal requirements and liability limits.