Deposit Insurance Goals Limited by Politics, Rohde Says

Danish central bank Governor Lars Rohde said political hurdles are forcing the European Union to stop short of adopting a cross-border deposit insurance system and instead rely on national guarantees.

“It’s not ideal, but you have to remember that this is a political question,” Rohde said of the EU strategy, which calls on nations to adopt common standards for deposit insurance while maintaining their own funds. The EU already requires nations to guarantee deposits for account holders up to 100,000 euros ($130,000) per bank.

In an April 5 interview, Rohde supported the strategy to begin with common bank supervision, followed by a push toward a common approach for shutting down or restructuring failing banks. Common deposit insurance isn’t part of the plan because Germany and other like-minded nations fear they’d bear too many costs on behalf of other countries.

“As things stand, there might be some concerns and suspicions surrounding some corners of the bank system and in some countries,” Rohde said. “There’s a certain logic in starting with a common supervision, which should ensure that we have a more unified quality.”

EU leaders last year decided to press for banking union to contain a debt crisis that’s now been raging for three years and has left five of the euro area’s 17 members relying on bailouts. European Commission data show the bloc’s governments have injected 1.7 trillion euros into their banking systems since 2008 as the fates of nations depended on the survival of their financial industries.

Test Case

Cyprus last month became a test case for investor losses as euro-area authorities required that the nation’s two biggest banks be restructured as a condition of a 10 billion-euro rescue. The model unleashed anxiety across Europe that creditors elsewhere might be required to accept similar losses. Luxembourg said a lack of clear rules risked spurring chaos. Dutch Finance Minister Jeroen Dijsselbloem said that countries need to rein in their bank systems or face EU consequences.

Uninsured depositors and all categories of bank bondholders have been in the crosshairs as the EU rethinks how to break the bank-sovereign link. Denmark, whose banks hold assets about four times the size of the $300 billion economy, led the way in shutting down banks and tapping creditors to protect taxpayers.

State Resolution

The 2011 failure of Amagerbanken A/S -- the first in the EU to trigger senior creditor losses within a state resolution framework -- pushed up funding costs across Denmark’s entire financial industry.

The nation’s reluctance to bail out its troubled banks has spared taxpayers losses. The government said in January it made a profit of 11.2 billion kroner ($1.95 billion) on its banking crisis containment efforts, after sponsoring hybrid instruments and backing senior funding instead of buying equity.

European leaders are working toward a June timetable to set minimum standards for individual deposit guarantee plans at the 27 member states. The deposit-insurance standards are on hold while the EU concentrates on parallel proposals to spell out which investors will absorb losses when a bank fails, also due in June, to be followed by plans for an EU-wide bank resolution authority.

Future efforts to achieve common deposit insurance look set to require more extensive cross-border bank supervision than the current national patchwork. Policy makers are also considering whether banks offering higher deposit rates should pay higher insurance premiums to back their savers.

Common Financing?

“The question is should we have common financing backing deposit guarantees,” Rohde said. “The answer is probably that it requires more sophisticated premium calculations that reflect the higher risk with certain institutions.”

EU lawmakers and national governments agreed on March 19 to a provisional deal to turn the European Central Bank into a supervisor for banks in the euro zone and other willing nations. The ECB has maintained that if depositors are protected consistently across the euro zone, including guarantees for small accounts and preference for uninsured depositors over other types of unsecured creditors, further measures aren’t needed.

The current EU deposit-guarantee proposal “provides a harmonized framework and should help shore up confidence in national schemes,” said ECB Vice President Vitor Constancio in a March speech. “This means that a single European scheme is not an essential component of banking union in the short term.”

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