European Deposit Insurance System (EDIS): Cornerstone of the Banking Union or Dead End?

Abstract

While the first two pillars of the Banking Union, a Single Supervisory Mechanism (SSM) and a European Resolution Mechanism (SRM) have been realized rather smoothly, the realization of the third pillar, a European Deposit Insurance System (EDIS), proves a bigger challenge. Already in November 2015 the European Commission issued its EDIS proposal. One year later, the European Parliament rapporteur proposed important amendments in her draft report. Since then, the legislative train has stopped, with the Council making the EDIS discussion dependent on additional risk reduction measures for the banking sector. In this contribution we examine the goals of creating EDIS, as well as the reasons and possible solutions for the long-lasting deadlock, and critically assess the main features of the different versions of EDIS currently on the table. We find that the three pillars of the Banking Union are heavily interconnected. The main reason why the realisation of EDIS has been put on hold, are indeed shortcomings in the single rulebook and the first pillar. With the adoption in 2019 of a number of risk reduction measures, progress on EDIS may therefore finally gain momentum. Furthermore, a well-functioning second pillar should drastically reduce the occurrence of DGS payout events. This has changed the nature of DGSs in the EU, which now have a broader responsibility in helping to ensure the availability of deposits at all times, also during resolution proceedings. All current versions of EDIS institutionally anchor this interconnectedness, bringing the SRM and EDIS under the auspices of the same Board, while close cooperation with the first pillar is also ensured. We conclude that the competing visions on EDIS equally further banking stability and equally allow efficient cooperation between the three pillars. From a banking stability perspective, more important than the exact version of EDIS would be other measures to complete the Banking Union, such as the realisation of a common backstop for the Single Resolution Fund and EDIS.