Further steps towards integration necessary prior to European deposit insurance scheme

The Bundesbank maintains that a joint EU deposit insurance scheme would be premature. Key preconditions are not yet met, according to the current issue of the Monthly Report.

In May 2015, the presidents of five different European Union institutions, such as the European Commission and the European Parliament, had presented a report containing proposals for completing economic and monetary union. These proposals include the creation of a European deposit insurance scheme. The Commission subsequently presented a roadmap, according to which the European deposit insurance scheme would be launched in 2017 with a re-insurance phase for national schemes, followed by a co-insurance phase beginning in 2020. According to the plan, the shares of contributions and potential compensation payments borne by the European deposit insurance scheme would rise over time. From 2024, national deposit guarantee schemes would be insured in full by the European deposit insurance scheme.

De-risking is decisive factor

The Bundesbank believes this plan to be premature. According to the Monthly Report, "Further steps towards integration in Europe are necessary before a European deposit insurance scheme can be created." One of the decisive preconditions is that banks de-risk.

Abolishing the preferential treatment by banking supervisors of sovereign exposures could make a major contribution to this end. This would make banks’ financial situation less dependent on the economic situation of their parent countries. Otherwise, a sovereign default would drag the sovereign’s banks into the crisis and thus communitise, through the European deposit insurance scheme, the economic fallout. According to the Bundesbank, "Ultimately, there would be a danger that, indirectly via this contagion channel, the deposit protection scheme would be left to foot the bill for the sovereign debt of other countries." Sovereign debt held by banks, unlike other debt, has thus far been exempt from capital requirements.

The Bundesbank sees insolvency legislation as a further key issue. Each nation has different rules governing corporate or personal insolvency. These national laws impact directly on banks’ risk situation and on the burdens they would have to shoulder if borrowers become insolvent. This means that a European deposit insurance scheme could communitise the consequences of insolvency regimes that treat firms or individuals favourably at the expense of the lending banks. Barriers to rapid compulsory enforcement by lenders are an example of such favourable treatment.

According to the Monthly Report, "Differences in the speed of integration would obviate the alignment of liability and control, which is necessary for economic activity." What this means is that the political conditions in the EU countries have not yet been harmonised. This could lead to discrepancies if the speed of integration is oriented to those nations which are already further advanced. These nations would then bear greater risk for the transition period since, in the eyes of the EU, they already have robust structures in place.

Regular contributions by banks

Member states are currently regulating their own deposit insurance schemes based on the EU Deposit Guarantee Directive as last amended in 2014. Under this legislation, the deposits of, for instance, retail customers are still insured up to €100,000 by the national deposit guarantee scheme if their credit institution declares insolvency. In Germany, there are statutory and voluntary deposit guarantee schemes, which are funded by their affiliated institutions through regular contributions. All banks involved in deposit business are required to belong to a statutory deposit guarantee scheme.