Haris Ashley
In 2015, the European Commission proposed the European Deposit Insurance Scheme (EDIS) to protect retail deposits in the banking union. The scheme seeks to guarantee depositors throughout the EU €100,000 per depositor and bank if an institution fails. The proposal was adopted as part of broader measures to deepen the economic and monetary union and complete the banking union. The introduction of EDIS raises questions about moral hazard among EU banks and the stability of the system in the short and long term. While some argue that it is a well-intentioned initiative, others believe it is premature due to the varying legal frameworks and national economic policies that impact the risk situation of banks.
| Characteristics | Values |
|---|---|
| Name of the scheme | European Deposit Insurance Scheme (EDIS) |
| Objective | To protect retail deposits in the banking union and guarantee depositors throughout the EU a €100,000 security on every deposit |
| Implementation stages | Three |
| Current status | The European Commission communicated that the installment of EDIS will go through three different phases of development over the next eight years. The first phase, a re-insurance scheme, was introduced in 2017 alongside the existing DGS. |
| Drawbacks | The main drawback is that it is premature as key conditions for this European project are not met. National economic policy still impacts domestic banks' financial situation and the legal framework is inconsistent across Europe. |
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What You'll Learn
The European Deposit Insurance Scheme (EDIS)
The scheme will be implemented in different stages, with contributions from EDIS progressively increasing over time. At the final stage of the EDIS setup, the protection of bank deposits will be fully financed by EDIS, in cooperation with national DGS. EDIS will exist on top of the DGS, providing an additional layer of protection for depositors. The introduction of EDIS raises questions about moral hazard among banks in the European Union. With an EU-wide system in place, banks may take on more risk in their investments, which could lead to their collapse during financial shocks or when depositors ask for their money back.
The European Commission communicated that the installation of EDIS will go through three different phases of development over several years. The first phase, introduced in 2017, was a re-insurance scheme that existed alongside the existing DGS. By 2024, the new system will replace the present deposit guarantee schemes, which were put in place locally by national governments. This timeline ensures that national DGS reaches a significant level of funding before the start of EDIS, which is a requirement for receiving support from EDIS in case of emergency.
EDIS is the third pillar of the European banking union and is intended to make the banking sector more resilient to future shocks. It guarantees depositors throughout the EU a 100,000 euro security on every deposit, a measure now put in place by DGS. The implementation of EDIS has faced some opposition, with Germany expressing concern about the risks still present in some countries' banking systems. However, other countries argue that setting up EDIS would reduce the risk of bank runs and, consequently, bank failures. The debate around EDIS continues, with EU leaders encouraging the discussion of ideas to move forward with the scheme.
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National deposit guarantee schemes (DGS)
Under the DGS, depositors are reimbursed up to a certain amount, typically €100,000, if their bank fails. This amount is guaranteed regardless of the available financial means of the DGS, and alternative means of financing the guarantee are available. The DGS is funded entirely by banks, with no taxpayer funds used. Each year, banks pay a levy into a national DGS fund, which is used to protect depositors if a bank fails. The European Banking Authority (EBA) collects data on the available financial means of each DGS and the level of deposits protected.
The DGS has been strengthened in recent years to provide better financial stability and protection for depositors. The EU has gradually increased the level of deposit protection since the first directive for DGS was introduced in 1994. The introduction of the European Deposit Insurance Scheme (EDIS) as the third pillar of the banking union further strengthens the system. EDIS will provide a stronger and more uniform degree of insurance cover, reducing the vulnerability of national DGS to local shocks.
While the DGS provides important protection for depositors, there have been proposals for reforms to improve the management of bank failures, particularly for small and medium-sized banks. These proposals include making resolution the norm for dealing with failing banks, establishing a common DIS for the EU, and increasing funding and backstops for deposit insurance.
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EU-wide solution to protect deposits
The European Union has proposed an EU-wide solution, the European Deposit Insurance Scheme (EDIS), to protect deposits of citizens and tackle future financial shocks. This proposal was made in June 2015, almost a decade after the financial crisis that resulted in bank runs and the failure of several European banks, leaving millions of Europeans with empty deposits.
EDIS is the third pillar of the European banking union and aims to guarantee depositors throughout the EU a €100,000 security on every deposit. This measure is already in place through national deposit guarantee schemes (DGS) regulated by Directive 2014/49/EU. However, these schemes are implemented individually by member states, and there was previously no EU-wide solution to guarantee deposits in case of bank failures across the Union. EDIS will provide a stronger and more uniform degree of insurance cover in the euro area, reducing the vulnerability of national DGS to large local shocks. It will also weaken the link between banks and their national sovereigns, ensuring that depositor confidence in a bank is not dependent on its location.
The implementation of EDIS will occur in different stages, with its contributions progressively increasing over time. By 2024, when EDIS officially begins, national DGS should have guaranteed 0.8% of the deposits of banks under their care, a level expected to be reached over a ten-year period. This is a crucial requirement for receiving EDIS support in emergencies. At the final stage of EDIS, the protection of bank deposits will be fully financed by EDIS, working in cooperation with national DGS.
One challenge to the implementation of EDIS is Germany's reluctance to save banks in other countries with funds contributed by German banks. As the most important economy in the Eurozone, Germany's approval is crucial to the proposal. Additionally, there are concerns about moral hazard; with an EU-wide system in place, banks may take on more risk in their investments, potentially leading to their collapse during financial shocks.
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Deposit Insurance Funds (DIF)
The Deposit Insurance Fund (DIF) is managed by the Federal Deposit Insurance Corporation (FDIC) to protect customer deposits at member banks. The DIF is funded mainly through quarterly assessments on insured banks. A bank's assessment is calculated by multiplying its assessment rate by its assessment base, which is determined by its total liabilities and must be paid each quarter. The FDIC insures deposits in each account of up to $250,000. This limit is also applicable to other FDIC-insured institutions, such as savings and loan associations and savings banks. The money in the DIF is set aside to pay back the money lost due to the failure of a financial institution.
The existence of the DIF provides account holders at banks with a sense of security. For example, if a bank were to close its doors due to bankruptcy, the DIF would cover deposits of up to $250,000. This assurance helps to reduce the fear of losing money that caused bank runs in the 1930s. The DIF balance and reserve ratio are published in the Quarterly Banking Profile, which allows for comparisons to the total assets of banks on the "FDIC Problem Banks List."
The DIF has two sources of funds: insurance premiums from FDIC-insured institutions and interest earned on invested funds. The FDIC has charged assessments and maintained a deposit insurance fund since its creation in 1933. In 2011, the FDIC amended its regulations to define a bank's assessment base as its average consolidated total assets minus its average tangible equity, resulting in banks paying assessments on their total liabilities rather than just insured deposits.
In the European Union (EU), a similar scheme called the European Deposit Insurance Scheme (EDIS) has been proposed to protect retail deposits in the banking union. EDIS aims to provide a stronger and more uniform degree of insurance cover in the euro area, reducing the vulnerability of national Deposit Guarantee Schemes (DGS) to large local shocks. While EDIS is expected to be implemented by 2024, it will develop in different stages, with contributions progressively increasing over time. At the final stage of the EDIS setup, the protection of bank deposits will be fully financed by EDIS, supported by close cooperation with national DGS.
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Pros and cons of a European deposit protection scheme
The European Deposit Insurance Scheme (EDIS) is a proposed scheme to protect retail deposits in the banking union. It was first proposed in 2015 as part of a broader package of measures to deepen the economic and monetary union and complete the banking union. The scheme has several pros and cons, which are outlined below.
Pros
- EDIS would provide a stronger and more uniform degree of insurance cover in the euro area, reducing the vulnerability of national deposit guarantee schemes (DGS) to large local shocks. This would ensure that the level of depositor confidence in a bank would not depend on the bank’s location and weaken the link between banks and their national sovereigns.
- EDIS would guarantee depositors throughout the EU a €100,000 security on every deposit, a measure now put in place by DGS.
- EDIS would be the finalization of the third pillar of the European banking union, strengthening the EU’s mission of creating an economic and monetary union.
- EDIS would provide a tool for solving problems of maintaining the stability of banking systems, increasing customer confidence in banks and other credit institutions, and preventing cases of mass withdrawal of deposits during economic crises.
Cons
- The introduction of EDIS raises questions about moral hazard among banks in the European Union. If banks are backed by an EU-wide system, they may take on more risk in their investments, which could lead to their collapse during financial shocks or when depositors ask for their money back.
- The transition period from re-insurance to full insurance imposes a possible problem regarding the contributions of banks.
- EDIS may be difficult to implement due to differences in interests between the main actors.
- EDIS could slow down the smooth implementation of DGS, as banks may have to pay more under EDIS than they did under DGS.
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Frequently asked questions
Yes, the European Commission has proposed the European Deposit Insurance Scheme (EDIS) to protect retail deposits in the banking union.
The EDIS is set to be implemented by 3 July 2024.
The EDIS will guarantee deposits of up to €100,000 per depositor and bank if an institution fails.
The EDIS will provide a stronger and more uniform degree of insurance cover in the euro area, reducing the vulnerability of national Deposit Guarantee Schemes (DGS) to large local shocks. It will also ensure that the level of depositor confidence in a bank is not dependent on the bank's location.
