11 February 2016

AFME: Key considerations for the design of EDIS

The proposal should complement the Single Supervisory Mechanism and the Single Resolution Mechanism and build upon the important progress made through the Bank Recovery and Resolution Directive and the Deposit Guarantee Schemes Directive. Centralisation of deposit insurance alongside resolution within the Single Resolution Board should also assist with the integration of deposit insurance in the recovery and resolution framework within the Banking Union. In this regard, the BRRD, DGSD, SSM and SRM should be fully transposed as a matter of priority and timely implementation should be a condition for Member States to benefit from increased risk-sharing under EDIS. EDIS will only work effectively if national schemes are harmonised and funded equivalently according to their target level. It is also important that steps have been taken to assess the asset quality and resolvability of those banks which did not participate in the ECB comprehensive assessment before they are covered by co-insurance under the EDIS.

When designing an appropriate framework for EDIS, it is essential to ensure that the role of deposit insurance is considered in the context of the recovery and resolution framework under the BRRD. This has made a number of important changes to the circumstances in which deposit guarantee schemes  are utilised, the ways in which they are applied, the likelihood of their use and the level of losses that they are likely to sustain when a bank fails. Importantly, the likelihood of the use of a DGS and the level of any losses incurred by a DGS is reduced.

In light of the recovery and resolution framework including the super-priority of insured deposits discussed above, it is likely that the DIF will be primarily used where the resolution strategy for a bank involves liquidation. The DIF would enable a speedy payout to insured depositors and recoup this through the liquidation. There should be a low risk of the DIF suffering losses provided that the SSM and SRM are performing their roles effectively, as this would require losses to exceed the value of all capital, subordinated debt, senior debt and uninsured deposits.

While the Commission stated in its press release accompanying the proposal that EDIS will be “overall cost-neutral for the banking sector”, the proposal is not accompanied by any substantive impact analysis demonstrating that this will be the case. It is important to consider the impact of the EDIS proposal on banks across the industry and to ensure that it does not adversely impact individual banks, a sector, business model or the overall industry. Further increases in the cost of contributions could create a level playing field issue with respect to banks based outside the banking union and could potentially have an impact on the cost of deposit accounts. A full impact assessment of the proposal should be conducted and made publicly available.

Despite the Commission’s statement regarding cost-neutrality, the proposal itself does not ensure that this will be the case because national authorities have the option of reducing national contributions but are not obliged to do so. This deduction should be made mandatory to avoid banks paying duplicative contributions to more than one deposit guarantee scheme. Furthermore, the proposal will directly increase the contributions paid by banks in Member States where the target level for ex ante funding could be 0.5% of covered deposits under the DGSD.

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