What are deposit guarantee schemes?
A deposit is a sum of money that a customer holds at a bank, such as in a savings account. The business model of most credit institutions is that this money is largely lent out to other customers, preserving the rest for depositor withdrawals. To shelter a large portion of these deposits even in the event of a bank failure, credit institutions contribute to an insurance fund, called a “deposit guarantee system.” This is important in order to maintain confidence in the banking system and to avoid a run on the bank during periods of stress.
How does deposit insurance work?
Until now, deposit guarantee schemes in Europe have been organized at national level, but with minimum standards agreed at EU level. According to EU rules, these systems guarantee up to an amount of 100,000 euros per depositor. In some Member States, various schemes exist, organized by different categories of banking institutions, such as savings banks, cooperative banks, public sector banks or private banks.
Should a national deposit guarantee scheme not be able to cover depositors’ losses in the event of a major bank failure, the burden of making good any shortfall could fall on taxpayers, which could affect the country’s accounts. The financial crisis has highlighted that the problems in the banking sector transcend national borders.
What is Europe doing?
In response to the financial crisis, European countries have decided to join forces to shelter taxpayers and protect depositors. As part of the banking union, large banks, which together account for more than 80% of eurozone banking assets, are now supervised in the same way across the eurozone through the Single Supervisory Mechanism, consisting of the ECB and national supervisors. The Single Resolution Mechanism manages bank resolution, i.e. the process of orderly restructuring in the event of failure or risk of failure.
Under consideration by European leaders is how retail deposit protection can be strengthened and made more consistent at the European level. This is the last component of the banking union that has not yet been achieved.
A European deposit insurance system would make it possible to protect depositors wherever they are. By pooling resources, it could be easier to handle major shocks and systemic financial crises that countries would not be able to deal with individually, without having to resort to public money. Such a system would also weaken the link between banks and the state, as the former would be less dependent on public funding in times of crisis.
How would a European deposit insurance scheme work?
The European Commission has proposed the introduction of a European system in several stages. In addition, it would take several years for banks to set up a deposit insurance fund with the aim of achieving a financial envelope of 0.8% of total guaranteed deposits. According to 2011 figures, this endowment amounted to around 43 billion euros. Studies show that a fund of this size would be sufficient to provide for the necessary disbursements even in more serious situations than the global financial crisis of 2007-2009. According to the current proposals, the contribution paid by each bank to the deposit insurance fund would depend on the risks taken in relation to other credit institutions within the banking union, rather than within national borders.