08 October 2015

Bruegel: What options for European deposit insurance?

The five presidents’ report on Completing Europe’s Economic and Monetary Union in June this year called for European Deposit Insurance to complete the Banking Union. European Council President Tusk also called for completing banking union by creating a European deposit insurance and he argued that this could be done without treaty change. A German “non-paper”, on the other hand, argued that a “discussion on further mutualization of bank risks through a common deposit insurance or an European deposit reinsurance scheme is unacceptable” unless a number of other measures are taken earlier that would render bail-in more likely, reduce the exposure of banks to sovereigns and reduce the link between banks and sovereigns. The non-paper also considers treaty change indispensable.

Reducing the link between banks and sovereigns is indeed a key issue that banking union aims to achieve. In the supervisory dimension, the SSM has already achieved a rather strong separation of banks from national pressures exerted through supervisors. However, one of the reasons for the ongoing debate of national vs European competences in supervisory matters relates to the treatment of deposits in the case of failure. As long as the national governments and national deposit insurances are the back-stops to banks, the link between banks and sovereigns continues to be strong. As a result, national authorities will demand a special role in the supervision of “their” banks. Recent conflicts between Germany’s approach to shift some authorities from the supervisor (i.e. the SSM) to the German finance ministry and the ECB’s assertion of its supervisory mandate are one potential case in point. Banking union therefore remains incomplete. Consequently, banks risk, funding costs, and performance of banks will depend on national policies.

A European deposit insurance is one of the many indispensable part of a complete banking union. We would argue that policy makers should broaden the debate on deposit insurance with the institutional question of bank resolution. Conceptually, it would make sense to combine a Single Deposit Insurance with the Single Resolution Fund and let it be administered by an enlarged Single Deposit Insurance and Resolution Board. [...]

A key issue to consider is whether and to what extent a European Deposit Scheme mutualizes risks of losses on depositors across borders or merely serves as a credit line to various national deposit insurance schemes.   Risk sharing across borders is important to ensure that funding conditions for banks across the EU do not depend too much on the location of the bank.

Deposit guarantees are currently national schemes. Their credibility depends on the amount of paid-in resources, the health of the banking sector in the country concerned and the health of the public sector, that serves as a back-stop to the national deposit guarantee. In particular, the deposit guarantee scheme directive, DGS, foresees that, if necessary, banks have to pay additional contributions to the national deposit fund. Moreover, if the fund is depleted in case of a large pay-out, the national deposit fund would typically get a loan from the national government.

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