Deposit guarantee reform in Europe: does European deposit insurance scheme increase banking stability?

Abstract

The financial crisis led to reforms of regulation and supervision in Europe, including Deposit Guarantee Schemes. The new rules for DGSs define their position and interaction within the safety net. DGSs form part of a system to maintain and enhance financial stability. According to the Five Presidents’ Report a European Deposit Insurance Scheme should be the third pillar of the Banking Union. The paper gives a contribution to the on-going debate providing an assessment of the DGSs reform and its evolution towards EDIS. It explains key elements of the new rules for DGSs putting them in a systemic perspective.

Keywords:

• Banking union
• deposit guarantee schemes
• financial stability

JEL codes:

• G21
• G28

Notes

1. LCR requires banks to hold enough high quality liquid assets to withstand an estimated cash outflows over a 30-day stress period and to promote short term resilience; NSFR limits over-reliance on short-term wholesale funding, encourages better assessment of funding risk across all on- and off-balance sheet items, and promotes funding stability.

2. Deposits of financial institutions and authorities are not covered (except for small local authorities). Deposits in non-EU currencies are also covered, which is important for small and medium-sized companies active in several countries.

3. During the transitional period, depositors in need may ask for a “social payout”, which is a limited amount to cover their costs of living. Depositors at bank branches in another EU country are paid by the DGS in that country (host DGS), acting as a “single point of contact” on behalf of the home DGS.

4. The project of the Report has a great relevance; in fact a unified and fully integrated financial system is important for effective monetary policy transmission, better absorption of economic shocks through adequate risk diversification across Member States, and general confidence in the euro area banking system.

5. As a final stage, a full European Deposit Insurance Scheme is envisaged in 2024.

6. Any use of EDIS funds will be closely monitored. Any EDIS funds that are found to have been received inappropriately by a national scheme will have to be fully reimbursed.

7. This is the same year when the Single Resolution Fund and the requirements of the current DGS Directive will be fully phased in.

8. This principle is one of the characteristics of the reformed DGS. In fact previously subsidiaries participated in host schemes while branches were covered by home schemes. Under new DGS rules, local schemes will act as a “single point of contact”. For consumers this means that they do not have to interact with a foreign deposit scheme when they have placed a deposit in a local branch of a bank from another EU member state. For DGs, it implies that they must manage payouts on behalf of the home DGS.

9. This condition reflects also different experiences with bank failures, financial system characteristics and the role that DGSs play within the specific financial system.