The SRB published key considerations on the crisis management and deposit insurance (CMDI) framework review.
Today, the SRB published key considerations on the crisis management and deposit insurance (CMDI) framework review.
Moving towards EDIS
EDIS as end-goal: In any reform of the crisis management and deposit insurance (CMDI) framework in Europe, the priority must be the completion of the Banking Union (BU). The European Deposit Insurance Scheme (EDIS) is indispensable to enhance financial stability, to overcome the sovereign-bank doom-loop and to avoid financial fragmentation in the BU. As long as we do not have a fully-fledged EDIS, the originally envisaged third pillar, the BU will remain incomplete and therefore still exposed to financial stability issues. In combination with the SRF, EDIS would also significantly increase the firepower and agility to deal with ailing banks in a consistent and efficient manner under the second pillar. A transition from the current national DGS systems to EDIS could be achieved in 5 years, with an initial degree of mutualisation (e.g. 20%), and gradually centralising funds to reach full mutualisation.
Moving towards the steady state: We appreciate the need to achieve gradual progress and political compromises to overcome the existing deadlock1. This is why the CMDI review should enshrine the hybrid model of EDIS into law, but with a time-bound transition period (e.g. 5 years) towards the steady state, i.e. full mutualisation. If this is not the case, we risk finding ourselves in a never-ending transitional period that could de facto perpetuate the national management of most banks’ failures, potentially resulting in further diverging national solutions. This could leave not only the third pillar, but also the second pillar, incomplete and would ultimately lead to a more fragmented BU (and banking market) and exacerbate the bank-sovereign doom-loop.
Governance and SRB role: In the steady state, the SRB should act as the central authority with powers to manage all bank failures in the BU, handling both EDIS and the SRF (which could eventually be merged to exploit economies of scale). In the interim period, the SRB could: (i) use, in particular, transfer tools at BU level (the combined use of SRF-DGS could be explored) to find potential acquirers, maintaining the franchise value of failing banks under the SRB’s remit; and (ii) play a coordinating role (which would increase step-wise) in the application of national DGS alternative measures. The latter role would ensure the consistent use of a stringent and harmonised least cost test (LCT), and that ailing banks ultimately exit the market, minimising the overall costs for the system.
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