On 24 November 2015 the European Commission published its proposals for the European Deposit Insurance Scheme (EDIS). The objective is to strengthen the protection of bank deposits at Eurozone banks.
The Deposit Guarantee Scheme Directive (the DGS Directive) requires all EU Member States to operate national deposit protection schemes providing 100,000 Euro of cover (for each depositor/bank relationship. Member States were required to implement the latest requirements of the DGS Directive by 3rd July 2015).
Suggestions of a single pan-EU scheme have not met with success and the latest directive was limited to further harmonisation of national schemes (including ex-ante funding).
Eurozone banks are now subject to the Single Supervisory Mechanism - SSM and the Single Resolution Mechanism - SRM (with its Single Resolution Fund), but depositors can only look to recover against the assets of the relevant national DGS. This major weakness in the Eurozone Banking Union was highlighted in the Greek financial crisis.
Claims by depositors at any/all Greek banks which failed would only be met from the financial resources available to the Greek DGS (as there was no larger Eurozone scheme in place). Claims could have exceeded the resources of the national Greek DGS and the Greek state (as the only ultimate back-stop source of funding for that scheme). This was another example of the so-called bank/sovereign loop which the Banking Union is designed to resolve.
The Commission has been planning, as the third pillar of the Banking Union, a mechanism to provide more powerful financial resources stand behind deposit protection and to ensure equal strength of protection for depositors at all Eurozone banks. Previous plans to achieve this goal have proved controversial.
EDIS and its scope
The draft legislation to create the EDIS takes the form of an amendment to the Special Resolution Mechanism Regulation. That Regulation, and the EU-wide BRRD (Bank Recovery and Resolution Directive 2014/59/EU), envisages the use of DGS funds both for the traditional role of compensating depositors when a bank has failed and the more modern role of using these funds in the resolution process to achieve a transfer of deposits to another bank.
EDIS will be administered by a Single Resolution Deposit Insurance Board which will be part of the Special Resolution Board.
Three phase introduction
There will be a phased development of EDIS – first a ‘reinsurance’ arrangement, then an increasing level of co-insurance until full mutualisation is achieved.
From 2017 to 2020 each national DGS would have the benefit of EDIS support by way of reinsurance. This would be available if the DGS has depleted all its resources and would provide a certain amount of liquidity assistance to the DGS and cover a specified amount of the final loss of the DGS (from both pay outs and in resolution procedures). EDIS would cover 20% of the excess/shortfall loss subject to a specified limit. EDIS reinsurance would only apply where the national DGS had met DGS Directive requirements has been fully funded.
From 2020 to 2024, EDIS would absorb progressively larger shares of the DGS losses (and the assets of the DGS would not have to be fully depleted). Thereafter EDIS would cover all losses and liquidity needs on pay outs and resolution
Funding of the EDIS
EDIS, like the national DG schemes in the Banking Union, is to be ex-ante funded by contributions from insured banks. Contributions will shift from the relevant DGS to EDIS (as the replacement for the relevant national DG schemes) without duplication for the contributing banks. The target funding level of 0.8% of covered deposits is to be achieved by 2024 (over 8 years). Based on bank balance sheets at 2011, the fund would reach 43 billion euro.
Contributions would be risk-based. Risk would be assessed initially on the risk to the national DGS, but the basis would eventually move to the risk posed to the EDIS.
Member State concerns
Member States such as Germany and Austria have concerns about the mutualisation of national protection schemes. They fear that their relatively strong deposit insurance schemes might have to bail out failed banks in other countries. Opposition extends across the Federal Governments, the legislators and the banking industry. The fact that 18 of the 28 EU Member States failed to correctly implement the DGS by December 2015 (6 months after the implementation date) has not helped the case for integration.
The Commission’s latest proposal goes some way to meet these concerns by including safeguards which make EDIS support contingent on a national scheme meeting DGS requirements and having been fully funded.
Dr. Joachim Kaetzler, Dr. Uta Richter