The European Commission (EC) today proposed a European deposit insurance scheme (Edis), the third and final pillar of its Banking Union framework which aims to break the link between eurozone sovereigns and their national bank sectors.
The draft regulation reveals how the resolution fund – which eurozone banks will begin contributing to from January next year – will be used to protect depositors if a bank anywhere in the bloc fails. Crucially, Edis will begin by taking a so-called reinsurance approach whereby it acts as a back-stop for national insurance schemes, before being fully operational in 2024.
Since the Edis concept was first floated in October 2012 it has faced significant opposition from authorities in Germany, which fear they will have to prop-up lenders in more fiscally lax states. Announcements accompanying its release this afternoon attempted to address these viewpoints.
“The Commission's proposal for a European Deposit Insurance Scheme builds on national deposit insurance schemes and would be accessible only on the condition that commonly agreed rules have been fully implemented,” said vice president Valdis Dombrovskis, responsible for the euro and social dialogue.
- Today the EC tabled proposals for a European deposit insurance scheme, the final pillar of its Banking Union which overhauls the oversite and regulation of eurozone banks;
- The regulation dictates how the single pot, which banks from the bloc must contribute to from January, will be used to cover depositor losses if a lender in the region fails;
- It takes effect in 2017 and converts progressively from a reinsurance scheme to a co-insurance scheme before being fully operational in 2024;
- Some in Germany have opposed the concept on the grounds that it creates the possibility of moral hazard on the part of some financially lax countries;
- The regulation attempts to address this by making the scheme’s reinsurance services conditional on national guarantee schemes being exhausted and complied with.
Today, EU member states must guarantee €100,000 ($106,243) per depositor per bank under the Deposit Guarantee Scheme Directive (DGSD). The EC’s plan builds on this by transitioning DGSs to Edis via three phases.
The first stage, which starts in 2017, sees Edis reinsure national schemes by supplementing DGSs when they have exhausted their own resources in compliance with the DGSD.
Starting in 2020, the second stage takes a coinsurance approach. National schemes would not be required to exhaust their own funds before accessing Edis, subject to certain limits and safeguards. To begin Edis must contribute only 20% of the guarantee, however this will increase over time.
The third phase starts in 2024 when Edis is expected to be fully operational and would fully insure DGSs.
Under each stage of Edis, eurozone depositors will receive the same level of protection they do today.
Avoiding moral hazard
Germany’s finance minister Wolfgang Schäuble has been one of the most outspoken critics of Edis.
In a paper prepared for his eurozone counterparts in September, he reportedly claimed that ‘the further mutualisation of bank risks through a common deposit insurance or European deposit reinsurance scheme is unacceptable’.
The EC has answered these concerns by having Edis insure those who have abided by EU rules. Namely, during the reinsurance phase, national DGS can only access Edis if the member state has fully complied with obligations under the DGS Directive.
Any wrongful contribution by Edis must be paid back by the DGS. Also, risk-weights will apply so that riskier banks will pay higher contributions than safer banks. Risk adjustments will apply from the outset, but will be strengthened as Edis is introduced gradually.
While Schäuble has opposed the scheme, central bankers elsewhere in the eurozone have warmed to it.
Earlier this month National Bank of Belgium governor Jan Smets wrote in IFLR that the SSM is inconceivable without a SRM and common deposit guarantee scheme, otherwise ‘there is a risk that taxpayers in one country alone would be saddled with the consequences of decisions which will from now on be taken at supranational level’.
Carlos Costa, governor of Banco de Portugal wrote that without the ‘SRM and a common deposit protection system…the separation between sovereign and banking risk will be incomplete.’
Towards economic and monetary union
Alongside the Bank Recovery and Resolution Directive (BRRD) and Capital Requirements Directive (CRD) IV’s tougher capital rules, the Banking Union aims to stop taxpayer bailouts and reinforce the bloc’s single rulebook.
The Banking Union’s first pillar, the single supervisory mechanism (SSM), took effect on November 4 2014. Under the SSM, supervision of banks deemed 'significant' was transferred to the ECB. Supervision of all other eurozone banks remains with the relevant national competent authorities but under ECB control.
The framework of its second pillar, the single resolution mechanism (SRM), was finalised last December when the European Council appointed the board that oversees the SRM and finalised the rules for banks’ contributions to the single resolution fund (SRF). They must start those contributions on January 1 2016.
Today’s proposal is part of an end-of-year push by EU authorities to further harmonise banking rules across the continent. Earlier this month the ECB launched a consultation on national authorities’ use of discretions under EU law, and next month its executive board will start drawing up 2016 working plans for each banking group, including thematic meetings and onsite inspections.
More on the Banking Union
Banks’ SSM growing pains
Global banking and financial policy review
Germany amends SRM law to address criticism