Dombret: Deposit insurance need not necessarily be European Bundesbank Symposium on banking supervision 2016

Speaking at the Deutsche Bundesbank's banking symposium, Executive Board member Andreas Dombret warned against the dangers of hastily implementing the European Commission's proposals to introduce a European deposit guarantee scheme. "If we want to bolster the European deposit insurance component, we should devote some thought to other possible solutions as well," he said at the event in Frankfurt am Main. The Commission's proposals foresee the gradual implementation of a system of comprehensive insurance by 2024, in which bank customers' savings would be covered by a European fund in the event of a bank insolvency.

Prerequisites have not been met

According to Mr Dombret, the key requirements for a functioning European deposit guarantee scheme have not yet been met, however. These include, first and foremost, ensuring that all member states implement the agreed recovery and resolution measures for credit institutions as well as those for harmonising the existing deposit protection schemes. Not all the member states are meeting this objective at present. In Mr Dombret's words, "Risks at the European level can be communitised only if all the members of the common deposit insurance scheme make the same efforts to limit the risks". Furthermore, sovereign risk in bank balance sheets needs to be reduced once and for all, and the preferential regulatory treatment of government bonds done away with. "If the status quo were to remain in place, a single deposit insurance scheme could mean the communitisation of sovereign debt through the back door," Mr Dombret cautioned. "And third, Europe needs to make genuine progress in economic policy integration, including a general insolvency regime," the Bundesbank Executive Board member added. The fact that such rules still differ significantly at the national level would otherwise have direct implications in terms of the banks' risk position and the burdens that lie in wait for them in the event that their borrowers become insolvent. "This means that they also have an impact on how likely the banks are to draw on the deposit insurance scheme - and how heavily," Mr Dombret remarked.

Alternatives need to be thoroughly examined

Against this backdrop, Mr Dombret called for a thorough review of alternatives to the Commission's proposals. In his opinion, it is particularly important not to lose sight of the main objective, which is to protect customer deposits and thus prevent a potential run on the banks. "In the vast majority of cases, national deposit guarantee schemes are adequate for that purpose," Mr Dombret explained. Only when a systemic crisis arises that threatens to engulf the entire financial sector, is a national scheme unable to cope. He voiced his doubts over whether the proposals by the European Commission are the best way of averting such risks. "Indeed, some distinguished economists believe that a European reinsurance system would be just as effective - and more efficient to boot," Mr Dombret noted. It would be equally conceivable to do away with a European fund altogether and permit mutual lending among the national systems. Both approaches would ensure that problems that can be fixed nationally remain in national ownership, Mr Dombret added.

National protection schemes are threatened

Dombret also expressed his concern that implementing the Commission's plans could endanger the existing national protection schemes, which include the voluntary deposit protection offered by the private commercial banks and the institutional protection schemes in the savings bank and credit cooperative sectors. The Commission's plans require all institutions, without exception, to pay into the European insurance fund, ie including those that are already members of such a national protection facility. "In other words, if institutions are members of a protection facility that makes a payout event less likely, they will effectively be paying into a fund they might never need to tap in the future," Dombret explained. This is raising concerns, especially in the savings bank and credit cooperative sectors, that the European insurance scheme will undermine the balance between what institutions contribute and what they stand to get in return. Well-considered economic ideas are needed, he said, to preserve the added value of pre-existing protection schemes. "One possible option could be to suitably incorporate the actual risk of participants in an additional protection facility defaulting into the calculation of their contributions to the European deposit insurance scheme", Mr Dombret reasoned.

ECB develops supervision further

Speaking at the same event, Sabine Lautenschläger, Executive Board member of the European Central Bank (ECB) responsible for banking supervision, highlighted the merits of the new world of uniform banking supervision under the aegis of the ECB. One major benefit of the Single Supervisory Mechanism (SSM), which gave the ECB responsibility for directly supervising around 130 significant institutions (SIs) back in 2014, is that it now allows banking supervisors to better compare a large number of similar banks from different countries and to use analytical insights to draw conclusions about potential risks. However, many national special regulations continue to complicate the work of European supervisors. For example, these include different procedures used to evaluate the suitability of members of credit institutions' governing bodies in the various countries. Furthermore, Ms Lautenschläger mentioned the prospect of easing the capital rules. The binding capital surcharge, she said, could be split into a mandatory and a recommended part. Korbinian Ibel, Director General of Microprudential Supervision at the ECB, said that this could lower, on average, the threshold at which a bank is required to cancel payout of dividends.