What is a deposit guarantee scheme?
Money deposited in a bank savings account, for example, is called a deposit. In line with their business model, most banks lend the deposited money to other customers, keeping a part of the amount in case someone wants to withdraw the money. Banks ensure that a large part of the deposits are safe in the event of bank failure by paying into an insurance fund. This is called deposit insurance or deposit guarantee. This is important to ensure that people have confidence in the banking system and do not all want to withdraw their savings at once in a stressful situation.
How does deposit insurance work?
Deposit guarantee schemes in Europe are currently organised at national level, although minimum rules are agreed at EU level. Under the EU-level rules, such schemes guarantee up to €100 000 per deposit. In some Member States there are several schemes organised by different banking groups, such as savings banks, cooperative banks, public sector banks or private banks.
If a given national deposit guarantee scheme is unable to cover investor losses in the event of a large bank failure, taxpayers’ money may have to make up the shortfall, which could damage the public finances of the country concerned. The financial crisis has shown that bank problems do not stop at national borders.
What is Europe doing?
In response to the financial crisis, Europe has strengthened its ties to protect taxpayers and depositors. The big banks in the Banking Union, which together account for more than 80% of total banking assets in the euro area, are supervised across the euro area through a single supervisory mechanism involving the ECB and national supervisors. The mechanism manages their resolution, an orderly restructuring process that is triggered when a bank is insolvent or on the verge of insolvency.
European leaders are currently discussing how stronger, more consistent protection for retail depositors could work at European level. This is the last missing link in the banking union.
A European deposit guarantee scheme would allow depositors to be protected wherever they are. And pooling of resources would make it easier to deal with major shocks and systemic financial crises that are beyond the capacity of individual countries to absorb, without the need to use public money. Moreover, such a system would weaken the link between banks and the relevant governments, as banks would be less reliant on public money in times of crisis.
How would a European deposit guarantee scheme work?
The European Commission proposes that a European-wide scheme should be introduced in stages. It would take banks several years to build up an insurance fund with a target size of 0.8% of covered deposits. Based on 2011 data, this size was equivalent to around €43 billion. Research suggests that a fund of this size would be sufficient to cover the payments needed even during a global financial crisis bigger than the one in 2007-09. Under current proposals, banks would pay into the fund according to their risk exposure compared to other banks in the banking union, not to other banks in the same Member State.