The recent Five Presidents’ Report set out a number of steps to further strengthen the EU’s Economic and Monetary Union (EMU). One of the key deliverables under the first stage of the Completion of the EMU is to move towards a European Deposit Insurance Scheme (EDIS) as a further step to a fully-fledged Banking Union. EDIS would mark an important step towards reinforcing financial stability by further weakening the link between banks and their national sovereigns and by delivering even greater trust in the safety of retail bank deposits, regardless of a bank’s location in the Union.
The Commission’s legislative proposal on 24 November 2015 introducing EDIS will strengthen the protection of bank depositors across the Banking Union. EDIS would develop over time and in three stages: first a re-insurance stage, then a co-insurance stage and, finally, a full European system of deposit guarantees, which is envisaged for 2024. The Commission’s proposal is accompanied by a Communication which sets out other concrete measures to further reduce remaining financial stability risks in the Banking Union.
2. How does EDIS fit within the Banking Union?
In 2012, the European Council agreed on a roadmap for completing EMU based on deeper integration and mutual support. Completing the Banking Union is an indispensable step to a full and deep EMU. The first pillar of the Banking Union consists of a common framework for supervision of banks to be implemented by the Single Supervisory Mechanism (SSM); the second pillar consists of a common framework for bank resolution to be implemented by the Single Resolution Mechanism (SRM).
Those two pillars have been put in place. The third pillar, a deposit insurance scheme, is still needed and needs to be put forward now. In contrast to the situation in 2012, the European banking sector is on a much more solid footing, following the introduction of more stringent capital and liquidity rules and centralised supervision and resolution.
3. Why do we need EDIS now?
EU legislation already ensures that all deposits up to €100 000 are protected, through their national deposit guarantee scheme (DGS), in case of a bank failure. However, national DGS can be vulnerable to large local shocks. EDIS provides a stronger and more uniform degree of insurance cover for all retail depositors in the Banking Union, ensuring that the level of depositor confidence in a bank would not depend on the bank’s location.
Any divergences, perceived or real, between national DGS can contribute to market fragmentation by affecting the ability and willingness of banks to expand their cross-border operations. EDIS would ensure a level playing field for banks across the Banking Union by reducing the vulnerability of national DGS to large local shocks, weakening the link between banks and their national sovereigns, and boosting depositor confidence overall.
In the Banking Union, EDIS would increase the resilience of the banking sector against future crises and contribute to financial stability. Ultimately, greater confidence in bank deposits would enable greater lending to the economy, meaning more growth and jobs for Europe.
4. What is the European Commission doing to reduce banking risks?
The Commission’s proposal for EDIS seeks to deepen EMU and to weaken the link between banks and their national sovereigns by means of risk-sharing among all the Member States in the Banking Union. However, this risk-sharing must be accompanied by risk-reducing measures that are also designed to break the bank-sovereign link. Therefore, the proposal is accompanied by a Communication, which sets out other measures to further reduce risks and ensure a level playing field in the financial system.
- The Commission’s first priority will be to ensure full transposition by Member States of existing legislation in this field, such as the 2014 Directives on Bank Recovery and Resolution (BRRD) and on Deposit Guarantee Schemes. Infringement proceedings against the relevant Member States are ongoing.
- Second, the Single Supervisory Mechanism must be able to operate as effectively as possible by reducing and aligning national options and discretions for banking prudential rules. We are working with the SSM to take steps to eliminate the remaining national options and discretions in EU banking legislation and to reinforce the single rulebook. This means that the same rules and supervision will apply to all banks.
- Third, we will further reduce the possibility of resorting to taxpayers for failing banks. We will bring forward legislation for adequate loss-absorbing capacity resources for banks and will implement the recently agreed international standards by the Financial Stability Board by 2019.
- Fourth, we will vigorously enforce EU state aid rules to minimise the use of public funding to maintain a solvent and resilient banking sector.
- Fifth, we will work to increase clarity and predictability by converging insolvency law as set out in the Capital Markets Union Action Plan.
- Finally, a number of further targeted prudential measures to address weaknesses will be dealt with by implementing the remaining elements of the regulatory framework agreed at international level, in the Basel Committee on Banking Supervision (for example: measures to limit bank leverage, to assure stable bank funding, and to improve the comparability of risk-weighted assets.)
The Commission will ensure that good progress is made on further measures to reduce risk, in parallel with the establishment of EDIS by 2024.
5. What does EDIS entail?
EDIS would be administered by a Single Resolution and Deposit Insurance Board (“the Board” [see question 17],) part of the Single Resolution Board, as the body entrusted with decision-making, monitoring and enforcement powers relating to the EDIS framework. A European Deposit Insurance Fund would be established to insure national deposit guarantee schemes (DGS).
National DGS would remain in place and would be part of EDIS. They would retain an important role in particular in the initial stages (re-insurance and co-insurance – see question 8). They would be first in line to cover pay-outs in the re-insurance period. In the co-insurance period, coverage of deposits would be shared between the Deposit Insurance Fund and the national DGS.
6. Which deposits would be protected by EDIS and in which scenarios?
Together with the national deposit guarantee schemes (DGS), EDIS would cover deposits below €100 000 of all credit institutions which are affiliated to any of the current national DGS in the Banking Union. In the first stages of EDIS (re-insurance and co-insurance – see question 8), funding would be shared between the Deposit Insurance Fund and the national participating DGS. The share of funding provided by EDIS in case of a pay-out would progressively increase. In the final stage (full EDIS [see question 8]), EDIS would fully fund pay-outs in the event of bank failures.
EDIS would intervene in two scenarios (along with the national DGS in the first two stages of EDIS):
- A) when a failing bank is liquidated and deposits need to be paid out, and
- B) when a failing bank is resolved and the transfer of the deposits to another institution needs to be financed so that deposit access is not disrupted.
To access the full press release, click here
Courtesy of the European Commission