13 February 2008

Trichet calls for pre-funded deposit insurance schemes

ECB President Jean-Claude Trichet said that for further convergence it may be advisable to move towards pre-funded schemes. Speaking at the ECB-CFS research network on “Capital Markets and Financial Integration in Europe” in Frankfurt he said that in addition to setting a lower bound, also the maximum amount covered could be limited and the specification which deposits are included and which not better harmonised. “Partial insurance, or the so-called co-insurance, for smaller deposits could be removed where it still exists, as recent experience seems to suggest that it may reintroduce incentives for retail depositors to run a bank”, he said.

Underlined the important role deposit insurance plays for crisis prevention and resolution, Trichet wared that “an ill-designed deposit insurance scheme can have important adverse effects”.

The main issues arise with respect to the compliance costs for cross-border banks and the competition between banks that are subject to differing rules and regulations governing deposit insurance schemes, he said. The amount of fully insured deposits per depositor within the EU varies between 20,000 and 103,000 euros. Furthermore, some schemes are pre-funded, others are only funded ex post, and again other schemes use a combination of the two.

“An important issue for further analysis and research is whether differences in coverage and funding structures have a significant impact on the competition among banks originating from different countries”, he said. “All these observations raise the issue as to whether the mechanisms for coordination at the level of the EU should be used to achieve more convergence in the various aspects of deposit insurance schemes in the context of the presently decentralised approach to financial regulation and stability.”

 “Convergence in deposit insurance arrangements across European countries should not advance in a way that neglects either the financial stability or the financial integration aspect of it.”

“Overall, we agree with the Commission’s “bifurcated” approach, according to which further progress at a shorter time horizon should first be achieved using the available non-legislative mechanisms and more fundamental reforms requiring legislation should be based on a deeper analysis, particularly considering the results of the debates on the financial stability set-up and burden sharing that are presently under way in Europe.”

Full speech

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