The European Commission has
recently launched a review of the Crisis Management and Deposit
Insurance framework. At the SRB, we have set out key changes to the
system that would enable the more effective management of bank failures,
in particular around deposit insurance. While we have a common deposit
insurance framework in the EU through the Deposit Guarantee Scheme
Directive, we lack a common deposit insurer.
Pooling resources at the
central level can create a strong fund, which benefits from increased
diversification of risks. Quantitative analysis around the European
Deposit Insurance Scheme proposal
confirms that a mutualised central fund will be more efficient than
many smaller funds, and reduce the risks faced by deposit guarantee
schemes. It would also help address the bank sovereign nexus. Reducing
the risk that individual deposit guarantee schemes prove inadequate, and
are forced back onto state resources during a crisis, reduces the
connection between the banking system and the state.
Under a fully integrated
Banking Union, costs arising for the central fund will be distributed
across the whole Union, rather than concentrated in one Member State.
This reduces the pro-cyclicality of the system, where costs arising from
a bank failure would otherwise mainly fall on banks within the same
country.
All these measures support
an important objective of the deposit guarantee system: to strengthen
confidence in our financial system. Protecting depositor confidence
avoids bank runs, which might otherwise overwhelm solvent banks. A fully
mutualised central scheme would mean that every depositor across the
Banking Union would have the same level of protection. The likelihood of
depositor flight increasing systemic risk during a crisis would be
reduced, given depositors would know that their protection would be the
same, no matter where they live. Introduction of a fully mutualised
central scheme would also entail having the same rules across Member
States, with relevant control at the Banking Union level to align
management and resources.
Banks may not yet see the
full benefits of the Banking Union because we have not agreed measures
to enable deepened cross-border integration, which would then lower
their cost base or provide more opportunities. Having made strong
progress in building a more resilient banking sector, there is a fair
argument we also have to take measures that will support the
competitiveness of European banks.
The way forward is to make
progress on all elements in parallel, with European deposit insurance
introduced as part of a holistic set of reforms. In particular, we
should consider measures to strengthen cross-border financial
integration. This would also strengthen financial stability, by boosting
diversification in the banking sector.
The SRB is also working to
ensure that the failure of cross-border banking groups can be managed
effectively, while protecting the financial stability of all Member
States. As our Chair has said, “Any revisions to the framework will have
to strike a fair balance between an adequate level of pre-positioning
[of capital and internal MREL] at the subsidiary level, and ensuring
that resources can be deployed effectively in resolution.” Beyond the
SRB’s work, further legislative amendments could enhance the framework
for managing cross-border banking group failures.
Taking all these measures
together, we can see that much work remains. But moving ahead on all
measures together would create a virtuous circle - where increasing loss
sharing and strengthening the crisis management framework builds
confidence to allow for increased cross-border financial integration.
This can then deliver a stronger banking sector, more capable of meeting
the needs of the European people as we come out of the Covid-19 crisis
and begin to invest in the recovery.