In November 2015, the European Commission (EC) proposed a regulation for a common system within the Single Market to guarantee savings in case of a bank defaults. This system, the European Deposit Insurance Scheme (EDIS), is meant to complement the common banking supervision mechanism and the centralised bank resolution authority and constitutes the third pillar of the Banking Union (BU).
However, disagreement reigns so far. The main concerns issue from Member States’ Governments as EDIS supposes an equal distribution of risks (risk-sharing) and an equal distribution of losses (loss-pooling).
Initial EDIS Proposal explained
Pursuant to Directive 2014/49/EU, national Deposit Guarantee Schemes (DGS) are instituted. The DGS, which are made of banks’ contributions, are meant to reimburse ‘a limited amount to compensate depositors whose bank has failed’, in case of a default.
In case national DGSs run out of liquidity, the EDIS would come into force, providing:
- phase I: a fixed amount of liquidity cover and a fixed amount of loss cover for national DGS;
- phase II: a higher amount of liquidity and loss cover, even where the national DGS funds have not been exhausted;
- phase III: EDIS replaces DGS and provides full cover for banks in default.
Current EDIS Proposal explained
In the same scenario, the EDIS would come into force and would only provide:
- in the first phase, a temporary liquidity feed to the DGS, which would have to be paid back;
- in the second phase, full liquidity feed to the DGS, with pay-back gradually reduced to 0%;
- in the third phase, any excess of the national DGS would be covered completely by the EDIS.
Inconveniences of EDIS
Bloomberg explains that the inconveniences of the initial EDIS structure were tied to Member States’ concerns of ‘being saddled with the consequences of their partners’ financial mismanagement’. This is the reason, according to both Bloomberg and Sven Giegold (see article here), why the EC decided to tune down its proposal for EDIS and put in place significant limitations to it (see BETTER FINANCE’s article here), although it is true that the final phase still results in full insurance for European saving deposits.
Nevertheless, phases I (re-insurance) and II (co-insurance) are heavily limited, and transition from one to another and to the final stage will be subject to certain conditions, under stringent scrutiny from Central Banks and the EC.
Both Bloomberg and Giegold, who reacted to the revised proposal of 11 October 2017, explain that while this is a very protective approach for regional environments, a fully-fledged BU cannot be achieved this way. Resilience to financial crises cannot be achieved without risk-sharing and pooling looses, economic growth and creation of jobs cannot be fostered in a fragmented and vulnerable Capital Markets Union.
Read here:
• BETTER FINANCE’s article Sven Giegold Demands Concrete Proposals to Bulletproof Bank Deposits;
• Bloomberg’s article Europe’s Backward Step on Banking Union;
• Sven Giegold’s article Banking Union: Real-Risk Reduction Instead of Old Wines in New Bottles;
• EC 2015 proposal for the European Deposit Insurance Scheme;
• EC 2017 revised proposal for the European Deposit Insurance Scheme;
• Directive 2014/49/EC on the Deposit Guarantee Schemes.