The effects of the 2008 financial crisis were supported by European citizens in their double quality as depositors and taxpayers. The overhaul of the banking sector (see article here) put mechanisms for prudential oversight and crisis resolution in place. Just one piece of legislation remains to be added to the European Single Rulebook: the European Deposit Insurance Scheme (for more information, see here). This is because the risk of contagion of local shocks still exists as the insurance mechanism for deposits, limited to the national level, might not prove sufficiently resilient under very stressful circumstances.
World Bank statistics show that non-performing loans in the E.U. dropped to 4.44% of total loans in 2016, representing 4.25% of the GDP (€629 billion – or €10 billion more than what Romania, Bulgaria, Croatia, Cyprus, Greece, Malta, Latvia, Lithuania, Estonia and Slovenia all together produce in an entire year). The DGS Directive requires Member States’ competent bodies to constitute funds (from contributions raised from banks) amounting to 0.8% of total deposits by 2024, which will cover losses of up to €100,000 per depositor. However, as pointed out by the European Central Bank in its Opinion on the EDIS proposal, resilience to systemic risks and contagion is more likely to be achieved if ‘risks would be spread more widely across a larger pool of financial institutions’. This would kill two birds with one stone, in that it would have a reassuring effect on depositors (see EC Effects Analysis) and decrease the chance of a bank-run.
Joint governance of EDIS through the Single Resolution and Deposit Insurance Board would oversee the administration and disbursement in t0+7 days of funds to cover any given liquidity shortfall, acting as solidary insurance between the 38 DGSs in the E.U (see EP Briefing Paper).
Read:
- BETTER FINANCE: Strong Together: The Case for a Fully-Fledged EDIS
- BETTER FINANCE: Overhauling the EU Banking Sector
- The current state of the EDIS Proposal in the legislative procedure.