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.