European Deposit Insurance Scheme Research Articles

A Regulatory Perspective on the Actual Challenges for the European Deposit Insurance Scheme

The European financial regulation is evolving with new and specific forms of cooperation for the member states, enhancing concepts and innovative rule of law, particularly featuring the actual level of harmonization. This paper investigates the European deposit insurance scheme, in the context of the European law development, in reply to the current economic and social challenges and in accordance with the principles of the free market. The methods of research include a theoretical investigation of the relevant literature, a comparison of the proposed regulation and regulation in force, synthesis, and deduction. The research results are based on the assessment of the progress of negotiation in building efficient mechanisms to stimulate money saving conduct for individuals and legal persons, globally and within the European Union. Acknowledging the status of the three pillars of the European banking union legislative package, the member states have unanimously agreed that the framework established by the Directive from 2014 needed a bracing approach, to ensure more protection and to support enhanced financial integration. The analysis carried out showed the importance of the European deposit insurance scheme in the context of the present global challenges. The money saving conduct was strongly influenced by the regulation for the deposit guarantee mechanism, while the tight estimated agenda for the final regulatory proposal asks for ingenious cooperation to reach a consensus within members states. The research showed the imperative to build common legislation for the member states and a future direction of investigation to evaluate the effects of the gap between the domestic regulation and milestone generated by the European directives in each state legal framework.

Completing Banking Union? The Role of National Deposit Guarantee Schemes in Shifting Member States' Preferences on the European Deposit Insurance Scheme

AbstractThe gridlock on the European deposit insurance scheme (EDIS), the missing pillar of the banking union, is most commonly attributed to moral hazard concerns on the side of Germany. However, Member State preferences on EDIS cannot be understood solely based on concerns over pre‐emptive risk reduction. Instead, banking sector interests connected to the institutional setup and legal status of national deposit guarantee schemes (DGSs) have also informed these preferences. This article examines the development of preference formation on EDIS for the cases of Germany, Italy and France after the initial 2015 proposal failed. National preferences on the institutional setup of EDIS have become more aligned with a reinsurance system that maintains existing DGS. Hence, current trajectories point to a discussion over how national DGSs are to be linked in a reinsurance system, instead of a discussion about whether it should be abandoned or not.

European Deposit Insurance Scheme(s) – Consequences for the EU’s Financial Stability

The aim of this paper is to evaluate the potential consequences that the shortcomings in harmonising the national deposit guarantee schemes may have on the financial stability of the European Union. The relevance of this subject is underlined both by the European Commission’s intention to revive the European Deposit Insurance Scheme project in 2021 and the recent signals from Germany that they are willing to support the initiative. The paper presents a review of the discussions on establishing a European Deposit Insurance Scheme, the reasons for the project’s failure and the consensus solution that took the form of the Deposit Guarantee Scheme Directive (DGSD). The limited scope of deposit guarantee scheme harmonisation under this directive is discussed in the context of the related EBA opinions pointing to different areas of potential improvements. Differences in national implementation are also reviewed in terms of their potential impact on financial stability. Apart from a careful literature review, statistical analysis of the available financial information characterizing the largest national deposit schemes of the euro is performed to quantify their progress towards the target level of the available financial means. The results prove that most national schemes are still far from reaching the 0.8% target level of readily available funds and that potentially desirable amendments to the DGSD may drag them even further away from reaching that target by 2024. The author concludes that from the perspective of financial stability, the EU should focus on establishing a single scheme at an international level that would complete the project of establishing a banking union. The results contribute to the ongoing discussion on the need to further integrate the national deposit guarantee schemes inside the EU.

Evaluation of European Deposit Insurance Scheme funding based on risk analysis

We carry out a quantitative analysis of the financing measures proposed for the European Deposit Insurance Scheme (EDIS) regarding the target level of the fund and the contribution scheme of member entities. We estimate the loss distribution of the EDIS considering different sources of systemic risk associated with the correlations between bank assets and we analyse the sensitivity of the results to bank portfolio risk. Our findings show how the interconnection between banks of different countries has an important influence on accumulated losses in the tail of the distribution. Likewise deterioration in the quality of bank portfolios produces a significant reduction in the fund's loss-absorbing capacity, which calls into question its soundness in times of economic recession. Finally, the contribution scheme provides more equitable risk measures and may be an appropriate incentive to reduce moral hazard in the Banking Union.

Public International Law as a Refuge of (Euro-)Member States During the Financial and Economic Crisis

The EU reform project ‘Banking Union’ has dominated the discussion on EU banking law in recent years. After the establishment of the European System of Financial Supervision (ESFS) comprising inter alia the European Banking Authority (EBA) in 2011, the Banking Union was proclaimed by the Commission in September 20121 and since then has been gradually implemented. While the European Deposit Insurance Scheme (EDIS) is highly contested and has been stuck in the legislative process for years,2 the two other columns of the Banking Union have been set in place. These are the Single Supervisory Mechanism (SSM) on the supervision of banks with a strong involvement of the European Central Bank (ECB) and the Single Resolution Mechanism (SRM) on the resolution of banks. With the SRM-Regulation,3 adopted in July 2014, a new European agency,4 the Single Resolution Board (SRB), was established. What is more, a Single...

EU 금융통합의 메커니즘과 제도

This study visualizes different positions of Germany and the counter-coalition of the EU members in the process of financial integration. The European Union, established by the Maastricht Treaty in 1993, has achieved an economic and monetary union (EMU), but has experienced the eurozone crisis due to lack of fiscal and financial integrations into its internal market. To deal with the instability of its economic system caused by the incomplete internal market, the EU members have pursued a banking union (BU) and a capital market union (CMU). The banking union has already established two of the three pillars, the single supervisory mechanism (SSM), and the single resolution mechanism (SRM). The third pillar, the European deposit insurance scheme (EDIS), is under way. Efforts to make CMU operational are also being discussed. Germany has assumed a critical role in the process of EU’s financial integration with some different views from the counter-Germany coalition. Germany has emphasized the importance of a network of the sovereign funds for banks resolution while the counter-coalition members favor the single resolution fund. Other members prefer discretion in SRM but Germany is for rules. And Germany desires to give the Council the decision-making power, however the counter-coalition members want to give the Commission the power. All these differences come from Germany’s emphasis on the Freiburg School’s economic principles of ordoliberalism, which view liability principle (Haftungsprinzip) very crucial for a competitive market economy.

European Banking Union: Context, Structure, Challenges and Opportunities

The European Banking Union (EBU) has had a complex strategic, political, economic and legal formation, and throughout the current turmoil there has been a special emphasis on preserving its stability and further development. The EBU formally consists of three interconnected pillars applicable to the euro area: (1) the Single Supervisory Mechanism (SSM) that encompasses European Central Bank’s (ECB) direct and indirect prudential supervision; (2) the Single Resolution Mechanism (SRM) that provides for a harmonized resolution framework; and (3) an envisaged safety net in the form of the European Deposit Insurance Scheme (EDIS). Additionally, the EBU is based on the common EU-wide Single Rulebook. A strong incentive for the EBU’s creation originated both from the repercussions of the global financial crisis and the European sovereign debt crisis. The EBU has experienced constant challenges from its very beginning, including the opposition to any indication of a transfer union, and criticism related to its design. Although progress is recommended on all elements, the most compelling is timely completion of the EDIS. From its inception, the EBU’s main goal has been to break the “vicious circle” between sovereigns and their banks – and that is in the focus of this article. Furthermore, this article explores the structure, achievements and inadequacies of the EBU pillars, and analyses potential threats and opportunities related to this segment of European integration.

European Deposit Insurance Scheme implementation: pros and cons

The creation of deposit insurance systems in world practice has become a tool for solving problems of maintaining the stability of banking systems, increasing customer confidence in banks and other credit institutions, and preventing cases of mass withdrawal of deposits during economic crises. The paper aims to examine why such an important pillar of the banking union as the European Deposit Insurance Scheme (EDIS) has not yet been implemented. The deadlock in the EDIS negotiations is unprecedented, and the likelihood that the agreement towards this pillar will be reached is rather low. The main reason for its blocking is the existing differences of interests between the main actors, and as a consequence, it makes the progress towards the completion of this process impossible. This study attempts to structure these interests, and it seems that the necessary tool to help bring them together is the concept of moral hazard. The results obtained confirmed the hypothesis that the main barrier for EDIS introduction is the severe difference of interest between countries that can be potentially major contributors and those that hope to benefit from that. Moreover, one of the arguments for such a delay is that cross-border subsidization leads to the problem when the country with better economic indicators pays for the debts of weaker economies as the costs should be socialized.

Removing the regulatory barriers to cross-border banking

The establishment of the Banking Union and the introduction of the European Single Rulebook seek to pave the way for a single banking market and to break the nexus between banks and sovereigns. Ideally, banks should be subject to a common set of rules and do business across the Banking Union without having to comply with different supervisory practices and methodologies. However, there are still loopholes and discrepancies in the legislative framework that cause regulatory fragmentation, among others, by allowing national authorities to take restrictive measures to protect national interests against the common interest.The present paper analyzes the current obstacles to the free flow of funds within cross-border banking groups operating in the Banking Union, namely the obligation for subsidiaries to meet prudential requirements (capital, liquidity and internal MREL) at individual level and the restrictions to intragroup exposures. To that end, this paper proposes some amendments to the Union regulatory framework aiming to achieve a dual objective; to strengthen banks’ profitability and overall financial position and to promote financial integration and consolidation of the banking sector, preferably through cross-border mergers and acquisitions (M&As). The proposed changes have become more significant today amidst the COVID-19 crisis and its impact on the European banking sector and the European economy. The European Central Bank (ECB) and the Single Resolution Board (SRB) have granted (temporary) relief measures to banks to withstand the effects of the pandemic and continue lending to the economy. Nonetheless, in light of the ECB’s pressure on banks to address effectively and timely the financial impact from the COVID-19 crisis, it is necessary to establish a framework to relieve banking groups from the unnecessary capital and liquidity burden placed on them. The aim of the proposed framework is to improve the banks’ ability to generate sustainable profits and, hence, to enhance their capacity to absorb the impact from the COVID-19 crisis and any future external shock as well.The proposed regulatory reform is governed by three (3) principles. Firstly, the introduction of a default approach for the application of reduced prudential requirements (capital, liquidity and internal MREL) to subsidiaries accompanied by the lifting of restrictions to intragroup exposures. Secondly, particular emphasis is placed on the Supervisory Review and Evaluation Process (SREP) and the resolvability assessment carried out by the ECB and the SRB respectively whose outcome may result in an increase of the prudential requirements. Thirdly, the establishment of a credible escalation mechanism to ensure that parent entities will remain committed to providing capital and/or liquidity support to subsidiaries should their financial situation deteriorate. The proposed mechanism serves as a safety net to prevent the failure of subsidiaries and, if that happens, to minimize the negative implications for domestic financial stability and fiscal sovereignty of host Member States.Under the proposed escalation mechanism, banking groups wishing to take advantage of the proposed capital and liquidity relief measures should sign intragroup financial support agreements on a mandatory basis. Furthermore, the group recovery plan should cover all the subsidiaries enjoying the proposed preferential treatment, irrespective of their materiality for the banking group and/or the host Member State. Once a recovery trigger relevant to a subsidiary is triggered, recovery action should be taken to restore the subsidiary’s financial position. If the parent entity is reluctant to respond appropriately to the worsening of the financial situation of the subsidiary, the ECB and the SRB should take early intervention measures, which could be extended to the parent entity. As a last resort measure, if a material subsidiary comes into a “failing or likely to fail” situation, the SRB may decide the write-down and/or conversion of internal MREL-eligible instruments into equity either independently or in combination with resolution action.The proposed regulatory measures could promote both financial integration and financial stability in various ways, particularly if were accompanied by the completion of some institutional reforms (e.g. establishment of the European Deposit Insurance Scheme).

The Five Presidents’ Report: An Assessment of the Measures Proposed to Complete Europe’s Economic and Monetary Union

The Five Presidents’ Report presents a range of actions to complete Europe’s Economic and Monetary Union. This article examines whether the Five Presidents’ Report will lead to significant beneficial reforms, having regard to the European sovereign debt crisis and the legal framework of the Economic and Monetary Union (EMU). The article discusses the background to the production of the Five Presidents’ Report, including how preceding reports responded to the European sovereign debt crisis. The proposals to create a European Deposit Insurance Scheme (EDIS), European Fiscal Board (EFB) and a Eurozone Treasury are focussed upon in this article. The article concludes that the measures proposed in the report do not go far enough towards establishing financial stability in the Eurozone. A key criticism is that counter-cyclical policy has not been the focus of the report’s recommendations on fiscal matters.

European Banking Union – an institutional analysis

Aim: The Banking Union is an important step towards a genuine Economic and Monetary Union. The strengthening of the European banking system has become a topic of debate since the 2008 crisis when it became clear that stability and security of the system security may require increased supervision over operations conducted. The Banking Union was created to avoid the situation that taxpayers are first in line to pay for bailing out ailing banks. The Banking Union consists of three pillars: 1) the Single Supervisory Mechanism (SSM), which centralizes supervision of European banks around the European Central Bank, 2) the Single Resolution Mechanism (SRM), which the main purpose is to ensure the efficient resolution for recapitalization failing banks, and 3) the European Deposit Insurance Scheme (EDIS), which is still unfinished. The creation of the Banking Union is accompanied by a remarkable transfer of sovereignty to the European level. This article aims to provide an overview of the changes unfolding across the Banking Union from a law and economics perspective and to explain the role of the European Central Bank in supervision over the banking system, which is different from the policy of controlling prices through determining the level of interest rates and keeping inflation under control.
 
 Design/Research methods: The analysis of the functioning Banking Union is based on the review of literature and analysis of reports and legal acts.
 
 Findings: The Banking Union supports financial integration in the EU by implementing a common set of rules and a common supervisory and resolution mechanism. The creation of the Deposit Insurance Scheme is likely to contribute to the protection of banks and consumers in case of a potential future crisis. The author argues that the European Central Bank as a supervisor of the financial market should create a second supervisory body, which would significantly strengthen the system and allow the ECB more efficiently fulfill its task as chief supervisor.

The missing European Deposit Insurance Scheme

The European Banking Union embarked as a highly ambitious project of the European Union as a response to the signifi cant fl aws and weaknesses in the original architecture of the European Monetary Union that became apparent during the economic crisis. However, the establishment of a single European banking system has stumbled upon the creation of a common deposit insurance scheme that could safeguard depositors and create a more stable fi nancial framework in the euro area. The European Deposit Insurance Scheme (EDIS) was fi rstly introduced by the European Commission in 2015. As a bold proposal that comprises wide risk mutualization among the euro area member states, it has spurred a vivid discussion in the European public speech and many proposals have been made since then altering its original planning in an effort to tackle the moral hazard concerns that have risen. The present article, after discussing the reasons that keep obstructing EDIS, presents these suggestions that move around, primarily, the role of the national deposit guarantee schemes. However, as highlighted in the article, before moving to any alterations on the structure and role of a proposed common deposit insurance scheme, signifi cant risk minimization on behalf of the national banking systems, must precede by limiting the sovereign exposures of banks and the size of the Non-Performing Loans. Such steps of risk minimization are critical for addressing concerns and the political unwillingness demonstrated by several European countries in moving forward towards deeper integration.

European Banking Union: a two-stroke reality

This paper focuses on the study concerning the European Banking Union’s conclusion. The European Banking Union was scheduled to come into existence in 2013, but it did not become a reality until 2014 when it implemented its first pillar: The Single Supervisory Mechanism. This European project appears, after the economic and financial crisis of 2007-2008 and the sovereign debt crises of 2010, as a fundamental complement to Economic and Monetary Union, since it is one of the blocks that allows its deepening, harmonising the supervision, resolution and protection of depositors in the Euro Zone. However, the third pillar, the European Deposit Insurance Scheme, has not yet been implemented, contributing to the non completion and inefficiency of this European project in the face of a new financial crisis.This text seeks to contribute to a better understanding of the European Banking Union and its pillars. It is divided into three parts: the first part is a brief background on the motivations behind the creation of the Banking Union; the second part concerns the three pillars that constitute it; and the third and final part is a brief conclusion on the outcome of this European project.

The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme

While the first two pillars of the European Banking Union have been implemented, a European deposit insurance scheme (EDIS) is still not in place. To facilitate its introduction, recent proposals argue in favor of a reinsurance scheme. In this paper, we use a regime-switching open-economy DSGE model with bank default and bank-government linkages to assess the relative efficiency of such a scheme. We find that reinsurance by both a national fiscal backstop and EDIS is efficient in stabilizing the macro economy, even though welfare gains are slightly larger with EDIS and debt-to-GDP ratios rise under the fiscal reinsurance. We demonstrate that risk-weighted contributions to EDIS are welfare-beneficial for depositors and discuss trade-offs policy makers face during the implementation of EDIS. In a counterfactual exercise, we find that EDIS would have stabilized economic activity in Germany and the rest of the euro area just as well as a fiscal backing of insured deposits during the financial crisis. However, the debt-to-GDP ratio would have been lower with EDIS.

United We Stand: Gruppenwettbewerb and European Banking Union

Banking union is arguably the most important EU reform since the Maastricht Treaty, transferring substantial authority to European regulators and taking a significant step toward fiscal union. However, it remains incomplete, as Germany has repeatedly blocked progress on the European Deposit Insurance Scheme (EDIS). This opposition contrasts with German support for an expansive Single Supervisory Mechanism (SSM) and limited Single Resolution Mechanism (SRM). This paper explains the inconsistent German position on banking union’s components by examining the interests of the different elements of the German banking industry in a multi-level governance perspective. While the savings banks and cooperatives have staunchly opposed any form of banking union, preferring local regulation, the commercial banks’ position is more complex. They saw the SSM as a way to eliminate their competitors’ national or local regulatory advantages both within Germany and elsewhere in Europe. The SRM similarly offered benefits for large banks by ensuring that resolution was funded at the European level. However, EDIS threatened their private deposit insurance scheme, so they joined with the other German banks in opposing its development. In doing so, they blocked completion of banking union.

Completing the Banking Union with a European deposit insurance scheme: who is afraid of cross-subsidization?

SUMMARY This paper investigates the impact and appropriateness of establishing a fully mutualized European deposit insurance scheme (EDIS) using a unique supervisory micro-level data set on euro area banks’ covered deposits and their other liabilities. We find that an ex-ante funded deposit insurance fund (DIF) with a target size of 0.8% of euro area covered deposits would be sufficient to cover losses even in a severe banking crisis. We then derive risk-based contributions to the DIF based on the different bank- and country-specific factors, showing that they can take into account the relative riskiness of banks and banking systems to tackle moral hazard. We also find that smaller and larger banks would not excessively contribute to EDIS relative to the amount of covered deposits in their balance sheet. Finally, we show that there would be no unwarranted systematic cross-subsidization within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the DIF.

Evaluation of European Deposit Insurance Scheme Funding Based on Risk Analysis

In this paper, we carry out a quantitative analysis of the financing measures proposed for the European Deposit Insurance Scheme (EDIS) regarding the target level of the fund and the contribution scheme of member entities. We estimate the loss distribution of the EDIS considering different sources of systemic risk associated with the correlations between bank assets inside and outside the eurozone countries, and we analyse the sensitivity of the results to bank portfolio risk. We determine the variations in the cost of insurance due to the relative risk profile of banks in the Banking Union and the loss-absorbing capacity of the contribution made by countries with the methodologies proposed by the European Banking Authority (2015). Our findings show how the interconnection between banks of different countries has an important influence on accumulated losses in the tail of the distribution, although the correlation within a country exerts a stronger effect. Both aspects must be considered in the calibration of the target level of the fund to avoid underestimating financing needs. Likewise, deterioration in the quality of bank portfolios produces a significant reduction in the fund's loss-absorbing capacity, which calls into question its soundness in times of economic recession. Finally, we assess the impact of the new contribution scheme on moral hazard and the possibility of cross-border subsidies between the countries of the Banking Union.

European deposit insurance scheme and bank board composition

This paper investigates whether bank corporate governance can play a role in the aggregate risk score assigned to individual banks by regulators. We exploit regulatory changes at the European level and a fixed-effects model to reduce endogeneity issues. We contribute to the existing literature on bank corporate governance by showing that board age significantly increases bank risk. This may indicate that boards formed by older members are more entrenched and can also be less dynamic. Board size and gender composition of the board are risk-neutral.

Completing the Economic and Monetary Union: Wisdom Come Late?

This paper provides a critical stocktaking of the debate on completing the Economic and Monetary Union (EMU) and an evaluation of the main reform priorities to strengthening its institutional architecture. In response to the sovereign debt crisis, reforms of the EMU have resulted in significant progress towards greater integration, as best epitomised by the establishment of the European Stability Mechanism (ESM) and the first two pillars of a Banking Union. In addition, the fiscal governance framework has been overhauled, with stricter rules and more powers at the supranational level to affect national budgetary policies. Because of these reforms, as well as of other policy measures at the national level, risks in the sovereign and banking sectors have been substantially reduced. The paper argues that major advances in risk reduction have not been matched by parallel progress in risk sharing: this asymmetry leaves the EMU incomplete and vulnerable. The paper contributes to the debate in three main ways: it examines the reforms proposed for the ESM, evaluates the role of a European Deposit Insurance Scheme—Banking Union’s missing third pillar—and reviews the case for establishing a central fiscal capacity for countercyclical manoeuvre. The paper emphasises that making progress in each of these architectural components of the EMU would go a long way toward closing the gap between risk sharing and risk reduction and ensuring the longer-term viability of the EMU.

Bank Stability and the European Deposit Insurance Scheme

Empirical evidence shows that a financial distress, faced by a bank or the whole economy, might cause large-scale withdrawals of deposits even when bank deposits are protected by deposit insurance, implicitly or explicitly guaranteed by a government. Building on Kiema and Jokivuolle (2015), we present a new model of such partial bank runs. In our model withdrawals are caused by the fear that both the bank and the government’s deposit guarantee might fail in the future. Our focus is on a guarantee rather than on insurance, since the assets of deposit insurance funds might not be sufficient in large-scale systemic crises. Guarantee failure is possible because, being sovereign, the government may choose not to keep its promises. This option causes a fixed welfare cost (e.g. a reputational cost), which in a sufficiently severe crisis may be smaller than the costs from deposit guarantee payments. We also assume that, being welfare-maximizing, the government recapitalizes the bank during the early stage of the bank run. When decisions concerning deposit guarantee payments are made, recapitalization costs are already sunk costs, but the partial bank run has reduced the coverage costs that the remaining deposits might cause for the government. In this way, the depositors who withdraw funds during a partial bank run decrease the danger of a deposit guarantee failure and increase the incentives of the remaining depositors to keep their deposits in the bank. We apply our framework to the European Deposit Insurance Scheme (EDIS), and we view the reliability of the Single Resolution Fund and its backstop as the counterpart to the reliability of the government’s promises. It turns out that in an asymmetric shock that affects only a single eurozone country, the EDIS improves bank stability, but its effects might be ambiguous in a systemic crisis that affects the whole Banking Union.