World Economy

Brussels Wants EU-Wide Deposit Insurance

Brussels Wants EU-Wide Deposit InsuranceBrussels Wants EU-Wide Deposit Insurance

The EU Commission has unveiled plans for a eurozone bank deposit insurance fund to become the third pillar of its much-vaunted banking union. Germany and Austria, however, are resisting the proposal.

On Tuesday in Brussels, European Commission vice-president Valdis Dombrovskis formally proposed a common European Deposit Insurance Scheme, which would protect depositors in banks throughout the eurozone in case of bank failures. The scheme would protect savings deposits up to €100,000 ($106,480) per depositor, DW reported.

“Completing the banking union is essential for a resilient and prosperous economic and monetary union,” said Dombrovskis, whose official title is European Commission Vice President for the Euro and Social Dialogue. “The Commission’s proposal for a European Deposit Insurance Scheme builds on national deposit insurance schemes and would be accessible only on the condition that commonly agreed rules have been fully implemented.”

Dombrovskis added that it was necessary to take further measures to reduce risks in the banking system, in parallel with setting up EDIS. The link between the balance sheets of banks and governments must be weakened, as well, so that the solvency of banks is not automatically threatened when sovereigns approach bankruptcy, or vice versa–a problem that has plagued Greece.

“Taxpayers should not be first in line to pay for failing banks,” Domvrovskis said.

 Third Pillar

Over the past few years, the eurozone has already introduced two of three key pillars of a European banking union: A single supervisor for all major eurozone banks, the “Single Supervisory Mechanism” to serve as a watchdog over banks, and a “Single Resolution Mechanism”, tasked with wrapping up banks that fail.

The European Central Bank was tasked with managing both the SSM, which took effect in November 2014, and SRM, which will take effect in January 2016. Under the Commission’s proposal, the unit of the ECB that administers SRM, the Single Resolution Board, would also be in charge of EDIS.

The commission envisions a step-by-step process that develops over nearly a decade, in three stages. In a first stage, the system would provide re-insurance for existing national savings deposit guarantee schemes.

At the end of three years, bank deposits would be coinsured partly by national deposit guarantee schemes and partly by EDIS, with the EDIS contribution increasing over time. In the third and final stage, starting in 2024, all bank deposits in the eurozone would be insured only by EDIS–subject to the limitation that only national banking systems that comply with common eurozone rules on risk management will qualify for EDIS.

EDIS would be funded by contributions from banks. Banks’ contributions would be risk-weighted, so that riskier banks pay higher contributions than safer banks.