The difficult construction of a European Deposit Insurance Scheme: a step too far in Banking Union?

Abstract

The German Government refused to accept the development of a European Deposit Insurance Scheme (EDIS) for Banking Union member states. Publicly, the German Government was preoccupied with the creation of a moral hazard that common funds would create for banks in those participating countries that had weak banking systems. This paper argues that to understand German moral hazard concerns it is necessary to look beyond the ideational – notably concerns stemming from German Ordo-liberalism – and focus on the existing national institutional arrangements that the German Government sought to protect. German moral hazard concerns stemmed from the fear that well-funded German deposit guarantee schemes (DGS) – especially those of small savings and cooperative banks – could be tapped to compensate for underfunded (and largely ex post funded) DGS in other member states. We thus demonstrate that the difficulties facing the construction of an EDIS owe to the weakness of the previously agreed harmonization of national DGS. This failure to harmonize schemes beyond a low minimal standard can be explained through an analysis focused on national systems. Different existing national DGS stem from the different configuration of national banking systems, the longstanding relationships among national banks and well-entrenched regulatory frameworks.

Keywords:

• Banking Union
• deposit guarantee schemes
• European deposit insurance scheme
• moral hazard
• banking systems

JEL classifications:

• G21
• G28

Notes

1. More specifically, the inclusion of depositor preference in the EU’s 2014 Bank Recovery and Resolution Directive means that depositors will only become part of the bank’s bail-in if bank losses are very large and claims by more junior creditors are insufficient to fill the gap or if financial stability concerns impose losses on other creditors above those implied by the need to resolve the problem at minimum cost.

2. The focus on banking system and DGS configuration as the main explanatory factor of national preferences does not deny the importance of the legal disagreements to the eventual construction of the EDIS. The EU Commission, the ECB and a number of member states argued that EDIS was an extension of EU policies to foster economic integration and that the EDIS’s legal basis was therefore Article 114 TFEU. Germany and a number of other member states argued that the EDIS would be a new European financial instrument and thus required Treaty change to adopt. Changing the Treaty required a unanimous vote, thus giving Germany the power to veto any proposal.

3. It should be noted that moral hazard concerns shaped German government reluctance on the creation of the Single Resolution Mechanism (SRM) but did not prevent agreement. However, on resolution the German government insisted that the new Single Resolution Fund (SRF) be created through an intergovernmental side agreement rather than EU legislation in order to ensure the maintenance of national control over the use of SRF funds to supplement national resolution funding in the resolution of banks. The creation of the EDIS however implied automatic access to European funds to cover insured deposits in the event of exhaustion of national DGS funds.

4. Between 1977 and 1983, France, the Netherlands, Spain, and the United Kingdom set up national DGS, and Germany revised its existing system. Following the European Commission’s (non-binding) recommendation concerning the establishment of national DGS, Italy set up a voluntary scheme for commercial banks in 1987, while Italian cooperatives had set up their own voluntary scheme in 1978 (Garcia and Prast 2004).

5. The term “bank levies” refers to, for example, the mandatory contributions paid by banks to the State budget for the purpose of covering the costs related to systemic risk, failure, and resolution of institutions.