EU Seeks Decade to Build Deposit Insurance Under Euro Road Map

  • New system set to be part of Single Resolution Board
  • Phase-in plan sets limits on risk sharing before 2024

The European Union wants to create a common deposit insurance system over a decade to minimize the risk of moral hazard as the new regime builds toward full risk-sharing, according to the plan presented Tuesday.

Three phases are foreseen for the European Deposit Insurance System, or EDIS, as proposed by the European Commission to strengthen the euro area and shore up financial stability. The new system would become part of the Single Resolution Board, a new agency set to manage euro-area bank failures as of Jan. 1, and would be mandatory for all members of the 19-nation currency bloc. Other EU nations have the option of joining. National authorities and the European Central Bank will work closely with the new system.

Banks will pay in gradually to a common Deposit Insurance Fund, or DIF, that will initially operate alongside national guarantee schemes and eventually absorb them. Nations and the European Parliament must agree on the system before it can start work. Depositors across the EU are insured for up to 100,000 euros, according to EU-wide standards.

2017-2019: Reinsurance

The first period is characterized by a “reinsurance” approach, in which national deposit guarantee schemes still bear the main responsibility to protect savers. These national funds would only be backed up by EDIS if their funds are exhausted.

  • The European DIF receives part of the contributions banks are paying into national schemes and does not raise additional contributions
  • The SRB will determine how much it will get from each national system to reach its target level
  • Each national DGS must cover losses equivalent to the prepayments it was supposed to have accumulated, plus what it can raise from member banks in three days of an emergency payout
  • The national systems need to raise funds equivalent to 0.14 percent of covered deposits by July 3, 2017, rising to 0.28 percent by July 3, 2019
  • If there is a shortfall based those required amounts, EDIS covers 20 percent of the gap and the remaining 80 percent has to be filled “from other sources,” including national systems if they have funds above the minimum
  • Contributions by individual banks will be determined by the DGS according to the banks’ riskiness
  • By the end of the reinsurance period, the target for the common DIF’s funds at the end of the period will be 8.9 percent of the sum of the required minimum funding national guarantee schemes

2020-2023: Co-Insurance

In the second period of “co-insurance,” the European deposit insurance system takes over a rising share of costs, starting with the “first euro” of insured losses.

  • Share of losses covered by the common DIF rises from 20 percent in 2020 to 80 percent in 2023
  • The DIF still receives part of the contributions banks are paying into national guarantee schemes and doesn’t raise additional contributions
  • Now the EU resolution agency determines how much each bank will contribute, taking over the calculations from national authorities
  • When calculating the contributions, considerations will include: loss-absorbing capacity; ability to meet short- and long-term obligations; funding sources and liquid assets; and asset quality and business model
  • The common DIF’s funding level, equaling the sum of all national schemes, has to reach 0.8 percent of all insured deposits in the countries covered by the common deposit insurance

From 2024: Full Insurance

All national deposit guarantees are now effectively only branches of the common EU system.

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