Bank deposits within the EU up to 100,000 euros, no matter which bank or country they are in, should be guaranteed by 2024 by a European fund, the European Commission proposed on Tuesday (24 November).
The EU already has a single supervisor for all eurozone banks and a fund for resolving failing financial institutions so that taxpayers are no longer on the line to save them.
The deposit guarantee scheme is the final element of the plan to boost citizens’ confidence in the banking sector which was rocked by the 2008 failure of Lehman Brothers in the United states and by the sovereign debt crisis afterwards.
The plan will be integrated in the coming months with new proposals to further strengthen the financial stability of the eurozone, including a review of rules on banks’ exposures to sovereign bonds, the Commission said.
“The Commission’s proposal for a European Deposit Insurance Scheme builds on national deposit insurance schemes and would be accessible only on the condition that commonly agreed rules have been fully implemented,” Dombrovskis said.
To get there, EU countries would start by filling up national deposit guarantee funds, which would be financed by banks paying annual contributions that would eventually amount of 0.8 percent of all deposits covered by the scheme.
At the same time, banks would also have to contribute, separately, to the central European Deposit Insurance Scheme (EDIS), which would gradually increase support to the national funds, in case they run out of money due to a bank failure.
This will however not result in further costs for banks.
By 2024, the EDIS would completely take over the guaranteeing of all covered deposits in the eurozone from the national schemes, the Commission proposed, even though national funds would remain in existence.
For the first three years of the transition period – so in 2017, 2018 and 2019 – the burden of paying out deposits in case of a bank failure would lie mainly with national funds, and, if these did not have enough cash, with national governments.
During these three years, if a national fund runs out of money, the EDIS would cover only 20 percent of what is still left to pay and the government the other 80 percent.
Some officials see this as the main weakness of the plan, because until 2019 it would leave in place the “doom loop” between failing banks and sovereigns who have to support them.
But others, especially Germany, think the European scheme is going too far as it is, because they do not want their own national funds guaranteeing savings in other EU countries.
“We need to make sure that risk-reduction goes hand in hand with risk-sharing,” the EU Commissioner for Financial Stability, Jonathan Hill, said in the Commission statement.
From 2020, the contribution of the EDIS would gradually grow every year for four years to eventually cover 100 percent of the payout needs in 2024.
That would also be the year when banks will have paid into the scheme the full 0.8 percent of all covered deposits. Riskier banks would pay higher contributions than those rated as safer.
S&D Group spokeswoman on economic and monetary affairs Elisa Ferreira said: "Today's proposal is a first step that needs to be strengthened during the upcoming legislative negotiations. We have to progress quickly to the completion of the Banking Union in order to finally break the link between banks and the states where they are located".
European Commission Vice-President Valdis Dombrovskis said: "Completing the Banking Union is essential for a resilient and prosperous Economic and Monetary Union." "We must weaken the link between banks and sovereigns, and put into practice the agreed rules whereby taxpayers should not be first in line to pay for failing banks," he added.
MEP Sven Giegold (Greens) commented that this proposal has to be binding for all banks but "it must not endanger exisiting solid institutional protection schemes of small banks." We therefore insist on a re-insurance scheme with risk-adjusted contributions," he underlined.
In 2012, as part of a longer term vision for economic and fiscal integration, the Commission called for a Banking Union that would place the banking sector on a sounder footing and restore confidence in the euro. The Banking Union was to be implemented step-by-step by shifting supervision to the European level, establishing a single framework for bank crisis management and, a common system for deposit protection. While the first two steps have been achieved by the establishment of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), a common system for deposit protection has not yet been established.
In order to strengthen eurozone governance, the presidents of the European Commission, the Council, the Eurogroup, the European Parliament and the European Central Bank were invited to combine their efforts to prepare the "next steps for a better economic governance in the euro area".
The Five Presidents' Report of 22 June 2015 and the Commission's Communication of 21 October 2015 included as the most significant priority for a first stage of eurozone reforms (without a treaty change) a European Deposit Insurance Scheme (EDIS), the missing pillar of the Banking Union.
While national deposits guarantee schemes are already in place and provide for the protection of EUR 100,000 per person/per account per bank, they are not backed by a common European scheme.
Phase 1: re-insurance (2017-2020); national deposit guarantee schemes could access the European Deposit Insurance Scheme (EDIS) only when it had first exhausted all its own resources and the country has fully adopted the EU rules in this field
Phase 2: co-insurance (2020-2024); National scheme would not be required to exhaust its own funds before accessing EDIS funds. The share contributed by EDIS will start at a relatively low level (20%) and will increase over a four year period.
Phase 3: full insurance; EDIS assumes the full risks of the national banks under the European single supervision.