Today, if a bank defaults, the Spanish deposit guarantee fund will guarantee the deposits of each investor up to a maximum amount of €100,000. However, the European Commission wants this to be an issue that no longer depends on the jurisdiction of each country. Europe is taking a step forward and wants to ensure all European citizens’ deposits have the same guarantees. To what amount? Also to €100,000.
The European Deposit Guarantee System
On 24 November, the European Commission presented a proposal to set up a European Deposit Insurance Scheme (EDIS). The EDIS is a definitive move towards European banking union, in conjunction with the single banking supervisor and the single resolution authority.
What is the EU seeking to achieve with this scheme? Simply to create a deposit guarantee program that minimizes the risk of panic mass cash withdrawals caused by the bankruptcy of an institution, and the risk of capital outflows from a country in crisis to another more stable country in the euro area. For instance, to prevent a repetition of the Greek “corralito” last summer. Events such as this have serious economic repercussions and largely reduce a country’s ability to recover, as evidenced by the situation in Greece.
For this reason, the confidence of bank deposit holders is key to strengthening financial stability and further weakening the link between banks and sovereign debt. The fund will be financed by the banks, with a contribution of 0.8% of guaranteed deposits, adjusted (upwards or downwards) according to the risk profile of each institution.
What is the current situation?
In April 2014, the European Parliament approved the general review of the directive on deposit guarantee systems, to further standardize and simplify the schemes existing in member states. The time limit for acting was also reduced and funding systems improved.
In this way, account holders and deposits are covered for up to €100,000 per person/account at each bank. Payment is made by the national guarantee fund of the country where the bankrupt entity is located, in a maximum of seven days. For instance, a deposit held in a branch of a Dutch bank in Spain would be backed by the Dutch deposit guarantee fund.
What is the EU’s new proposal?
The objective of the new proposal is to establish a European deposit insurance system to ensure that all retail deposits held under European banking union have the same level of protection, regardless of the member state in which the banking entity is located. Its main features are:
- A European deposit guarantee fund will be set up, funded directly by contributions from banks, adjusted in accordance with each entity’s risk level.
- A single monitoring board will manage the European deposit insurance system.
- Deposit holders will continue to enjoy protection up to €100,000.
- Only those national guarantee systems that comply strictly with the European directive and apply the measures recommended by the Commission to mitigate risk will be insured.
- It will be obligatory for all euro area member states whose banks are controlled by the Single Supervisory Mechanism. The European Deposit Insurance Scheme will also be open to all member states wishing to join the banking union.
What time frame are we talking about?
The European Deposit Insurance System will be rolled out in three stages, deployed gradually through to its full implementation in 2024:
- Reinsurance stage (from 2017 to 2020): national deposit guarantee funds will only be able to access European funds when they have used up their own funds. Funds requested must be justified and in response to a possible moral risk. Additionally, the deployment of the funds will be closely monitored.
- Co-insurance stage (2020 to 2024): during this stage, the national funds will not be obliged to exhaust their own resources before accessing European system funds. The European system will be responsible for part of the costs from the moment that money has to be returned to deposit holders. The contribution rate will start at 20% and increase gradually over the following four years.
- Full insurance (2024 onwards): the participation rate in the European Deposit Insurance System is expected to reach 100% at this date, after which the single resolution fund will have been fully established.
Solidarity is required from the outset. In the first stage, countries will be requested to exhaust national funds before making use of European funds (although there will be a limit). From the second stage of the process, risks will be genuinely mutualized as payments will be shared from the first cent. Therefore, European funds will be used without national funds having to be used up first.
What difficulties are envisaged?
In the first place, to stop Germany opposing the measure. Germany believes that this system is closely linked to fiscal union, for which it considers that Europe is still not prepared. Holland and Finland are not convinced by the measure either because they consider it to be a further step towards the mutualization of debt. Germany is also asking for a significant reduction in banking risk before allowing this common fund to be set up and is threatening to take the issue to court.
Negotiations are therefore not expected to be easy. Proof of this lies in the European Council’s decision to withdraw from the draft conclusions of its last meeting in 2015 – that sets the route map for 2016 - the reference to setting up this single deposit insurance system, as disclosed by the newspaper Expansión.