The Rationale for Deposit Guarantee Schemes
[...] A European system would allow the risks and costs of financial shocks to be diversified across countries, therefore benefiting each individual economy. Those gains are particularly important in a financially integrated region such as the EU, and even more so in the euro area.
A comparison between the EU and US systems further underlines this point: it is apparent that the EU and euro area DGS systems are much more recent, and that the current size of the US Deposit Guarantee Scheme in relation to the covered deposits is more than three times that of the EU or the euro area (after a sharp rebound from the depletion suffered during the 2008 crisis,). The US coverage is rather generous (it covers close to 80% of deposits, compared to less than 50% in the EU), and its DGS fund is fully capitalised ex ante, while in the EU several Deposit Guarantee Schemes are still funded ex post and several are still in the process of progressive capitalisation. However, when the EU DGS system reaches its planned level of 0.8% of covered deposits, the coverage ratio will be similar to that in the US. Another difference between the EU and US system is that, given the greater willingness of US regulators to ‘resolve’ banks, the actual use of DGS funds is much more frequent in the US than in the EU.
A side effect of the Deposit Guarantee Scheme harmonisation at the EU level is that deposits in some Member States are now insured at very large multiples of their GDP, implying likely difficulties for at least some Member States in honouring this guarantee unsupported. [...]
Options for a European Deposit Insurance Scheme
There are several possible options to devise a European Deposit Insurance Scheme (EDIS). They include:
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a full replacement of the existing system by a single, euro area Deposit Insurance Scheme;
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the creation of a complementary ‘top-up’ euro area Deposit Insurance Scheme (a ‘20th DGS’ regime);
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a reinsurance mechanism to the existing euro area Deposit Guarantee Schemes;
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a system of inter-Member State (E)DGS cross-lending. [...]
The Institutional Location of an EDIS and the Need for a Backstop
Where a European Deposit Insurance Scheme should be located institutionally remains an important question. Instead of creating an additional institution, it is possible to house the EDIS in the newly created but already operational Single Resolution Board (SRB), hence addressing the potential shortcomings of separating resolution and deposit insurance in the euro area.
It is already the case that the Single Resolution Board has to interact closely with the Single Supervisory Mechanism and with the national Deposit Guarantee Schemes, as they are part of the bank resolution process. There is merit in enabling the Single Resolution Board to combine resolution and deposit guarantee functions more formally, going beyond a simple ‘pay box’ set up. This would make the most of the fund management expertise it will develop with the Single Resolution Fund. In addition, the Single Resolution Board’s experience with the progressive mutualisation of the ‘national compartments’ of the Single Resolution Fund provides a natural reference for the evolution from a top-up or reinsurance scheme towards a fully mutualised EDIS. The successful capitalisation of the Single Resolution Fund is also likely to provide comfort to Member States when it comes to the implementation of a genuine European Deposit Insurance Scheme.
Additionally, historical experience also shows that a Deposit Guarantee Scheme at some point in time needs a formal, pre-agreed and transparent backstop framework, given that the accumulated amounts in even fully-funded Deposit Guarantee Schemes are unlikely to be sufficient in case of systemic crises. At least in the euro area case, the backstop function could be achieved through a credit line to the Single Resolution Board by the European Stability Mechanism (ESM). This would, however, demand a change in the ESM treaty. [...]
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