Commission’s leaked study beefs up arguments to complete banking union

A general view of a sign in front of the building of the European Central Bank (ECB) in Frankfurt. [EPA-EFE/RONALD WITTEK]

The probability of liquidity shortfalls to protect bank depositors in a new 2008-like crisis would be cut by half if the EU completed the banking union with a European Deposit Insurance Scheme, according to a European Commission analysis seen by

According to the modelling analysis on the European Deposit Insurance Scheme (EDIS), the probability of liquidity shortfalls, meaning covered deposits (up to €100,000) that would not be protected in a banking crisis, would be 87% in a crisis scenario similar to the previous financial crisis. 

But this probability would fall to 46% in the case of having a fully-fledged EDIS in place, while it would be slightly higher in the case of hybrid models (47%-56%).

The Commission presented these results to the member states on Tuesday (2 February), during the “Ad Hoc Working Party on the strengthening of the Banking Union”

This study is part of the ongoing efforts to progress on EDIS, the remaining pillar of the banking union and the most difficult piece of the framework. 

Only a few countries, in particular Germany, oppose the mutualisation of European deposits until progress has been made on other fronts, including further reduction of banking risks or tackling the concentration of sovereign debt held by banks.

German plan brings 'new impetus' to banking union, Eurogroup says

Finance ministers on Thursday (7 November) welcomed a German initiative to unblock proposals for a common bank deposit guarantee scheme in the eurozone, but questioned Berlin’s request to ask additional capital buffers in return for banks holding sovereign debt.

The Commission concluded that “all variants of EDIS considered in the analysis significantly reduce the likelihood and the size of liquidity shortfalls even under a systemic event.”

In addition, the increased probability of full protection of deposits allows for reducing the volume of the national schemes in relation to the covered deposits (currently at 0.8%), cutting costs for the banking sector and member states.

Given the lack of progress over the past years on a fully-fledged EDIS, with a common scheme to protect depositors in the banking union, member states focused on a hybrid model to try to reach a breakthrough.

This formula is based on the coexistence of a central fund and the national deposit guarantee schemes. The central fund would provide liquidity support only when the national schemes are depleted, and other national schemes would have the obligation to provide liquidity to the central fund if needed.

But there are many outstanding technical issues to solve on the hybrid formula. Portugal, chairing the EU Council presidency this semester, presented its plan to tackle these obstacles during the meeting on Tuesday. The goal is to present a report to the eurogroup in early June.

In parallel with this technical work, euro area leaders also mandated their finance ministers with preparing this semester “a stepwise and time-bound work plan” on all the pending elements to complete the banking union, referring mostly to EDIS.

Commission eyes new proposal to unblock deposit insurance scheme

The European Commission is considering tabling a new proposal on the European Deposit Insurance Scheme (EDIS) in a bid to break the long-running deadlock and complete the banking union, a Commission official has said.

In addition, the Commissioner for financial services, Mairead McGuinness, is also considering putting forward a new proposal on EDIS to break the deadlock.

In the preparatory documents for Tuesday’s meeting, seen by EURACTIV, Portugal flagged as the key issues to address in the hybrid model the size of the central deposit insurance fund; the mandatory lending between the central fund and national schemes; the governance of the scheme; and provisions for the liquidity support for national schemes, including caps.

The hybrid model is a loan-based system whereby a beneficiary national deposit guarantee scheme would have to reimburse the liquidity support to the central fund, with interests.

In the paper, Portugal argued that EDIS would “gradually reduce the reliance of national deposit guarantee schemes (financed by banks) on national backstops (financed by the public coffers), helping to break the link between the banking system and the sovereign and avoiding the use of taxpayers’ money.”

Portugal also stressed that “the credibility, effectiveness and firepower of EDIS are paramount to ensure the confidence of all depositors.”

For that reason, Lisbon underlined that the mechanism must ensure that all depositors benefit from “high and uniform protection”, regardless of the member state where the bank is located.

[Edited by Zoran Radosavljevic]

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