11 April 2018
Money that is kept at a bank, for example in a savings account, is called a deposit. The business model of most banks is to lend out this money to other customers, keeping only a portion of it available for people wanting to withdraw money. To make sure that a large portion of these deposits is safe even if a bank fails, banks pay into an insurance fund known as a deposit guarantee scheme. This is important to preserve trust in the banking system and dissuade people from all seeking to withdraw their savings simultaneously at times of stress.
So far, deposit guarantee schemes in Europe are organised at national level, although minimum standards have been agreed at EU level. Under EU rules, €100,000 per depositor is guaranteed through such schemes. Some Member States have several schemes in place, organised by different banking groups, such as savings banks, cooperative banks, public sector banks or private banks.
If a given national deposit guarantee scheme cannot cover depositor losses in the event of a big bank failure, taxpayers might have to cover the shortfall, which could in turn harm that country’s public finances. The financial crisis showed that banking problems do not stop at national borders.
Europe’s response to the financial crisis was to move closer together to shield taxpayers and protect depositors. As part of the banking union, the large banks which together hold more than 80% of all bank assets in the euro area are now supervised in the same manner across the euro area through the Single Supervisory Mechanism, which consists of the ECB and national supervisors. The Single Resolution Mechanism manages their resolution, which is the process of an orderly restructuring when a bank is failing or likely to fail.
European leaders are discussing how a stronger and more consistent protection of retail depositors could work on a European level. This is the last part of the banking union that is still missing.
A European deposit insurance scheme would be a way to protect depositors no matter where they are. Pooling resources could make it easier to handle large shocks and systemic financial crises that exceed national capacities without having to turn to public money. Such a scheme would also weaken the link between banks and their respective national governments as banks would depend less on public money in crisis times.
The European Commission proposed that a European scheme be introduced in stages. It would also take several years for banks to build up a deposit insurance fund with a target size of 0.8% of covered deposits. This size corresponded to around €43 billion based on 2011 data. Research shows a fund of this size would be sufficient to cover the pay-outs needed even in crises more severe than the 2007-09 global financial crisis. Banks’ contributions to the deposit insurance fund would depend on the risks they take compared with other banks in the banking union, rather than with other banks in the same Member State, under current proposals.