|
Brussels, |
|
European Deposit Insurance Scheme (EDIS)
1. European Deposit Insurance Scheme (EDIS)
|
In 2015, the European Commission proposed to create a European Deposit Insurance Scheme (EDIS), a common deposit insurance framework for banks within the European Union. Its primary goal is to enhance depositor protection and promote financial stability across EU member states. EDIS is a component of the broader EU Banking Union initiative, which seeks to establish a more integrated and harmonized banking and financial system across the member states. The proposal, accompanied by a Communication, is not still approved by the EU.
Key features and goals of EDIS include: - Deposit Protection: EDIS aims to provide a consistent level of protection to bank depositors across all EU member states. It would ensure that depositors' funds up to a certain threshold are safeguarded in case of a bank failure. - Risk Reduction and Risk Sharing: EDIS is designed to contribute to both risk reduction and risk sharing. Risk reduction involves measures to reduce the likelihood of bank failures and improve the stability of the banking system. Risk sharing refers to the idea that financial burden should be shared collectively across EU member states, rather than falling solely on the affected country's resources. |
Click to read
|
- Phased Implementation: The implementation of EDIS was proposed to occur in several phases, allowing for a gradual transition to a fully integrated system. The first phase would involve the establishment of a national deposit insurance system in each member state, followed by the establishment of a European Deposit Insurance Fund (EDIF), which would provide financial support in case of significant cross-border bank failures.
- Mutualization: The ultimate aim of EDIS is to achieve a level of mutualization where the EDIF would be funded by contributions from both national deposit insurance systems and a European component. This would lead to the pooling of resources to manage and cover potential losses from bank failures.
- Mutualization: The ultimate aim of EDIS is to achieve a level of mutualization where the EDIF would be funded by contributions from both national deposit insurance systems and a European component. This would lead to the pooling of resources to manage and cover potential losses from bank failures.
2. Crisis Management and Deposit Insurance (CMDI)
On 18 April 2023, the European Commission has adopted a proposal to adjust and further strengthen the existing EU bank crisis management and deposit insurance (CMDI) framework. The proposal will enable authorities to organise an orderly market exit for failing banks of any size and business model, including smaller players.
Overall, this will further preserve financial stability, protect taxpayers and depositors, and support the real economy and its competitiveness.
The proposal has the following objectives:
The European Commission's Communication on the review of the crisis management and deposit insurance (CMDI) framework is a significant step towards reinforcing and completing the Banking Union. Established in response to the financial crises that shook the global economy and the Eurozone, the Banking Union was designed to enhance financial stability across the EU. It aimed to support economic growth, competitiveness, and to address new challenges such as digital and green transitions, and geopolitical tensions.
The Banking Union stands on two operational pillars: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), both of which have significantly increased the resilience of the EU banking sector. However, the third pillar, a common deposit protection scheme, has yet to be fully realized due to a lack of political consensus.
The Commission's review, initiated by the December 2020 Euro Summit's call for a comprehensive plan to complete the Banking Union, underscores the importance of strengthening the CMDI framework. This initiative is not just a response to past financial crises but a preemptive measure against future vulnerabilities, as recently evidenced by banking crises outside the EU.
The CMDI reform aims to enhance how the EU manages bank failures, focusing particularly on smaller and medium-sized banks. These institutions have posed unique challenges in terms of depositor confidence and financial stability, often leading to a reliance on public funds—a situation the reform seeks to avoid. By clarifying the public interest assessment for crisis management, facilitating the use of Deposit Guarantee Scheme (DGS) funds in crisis resolution, and ensuring a harmonized approach across Member States, the proposal aims to make the banking sector even more robust.
An integral part of making the CMDI framework more effective is the establishment of a common deposit insurance scheme (EDIS). This scheme would not only provide a safety net for depositors across the Banking Union but also ensure a level playing field and avoid market fragmentation. Despite the technical and political challenges that have stalled EDIS negotiations for years, the Commission's communication reiterates the urgency and importance of reaching a political agreement on EDIS to complement the CMDI reforms.
In conclusion, the Commission's proposal to reform the CMDI framework, along with the push for EDIS, marks a critical effort to complete the Banking Union. By enhancing the mechanisms for crisis management and deposit insurance, the EU aims to bolster financial stability, protect depositors and taxpayers, and ensure that its banking sector can face future challenges with greater resilience. The call for swift agreement on these reforms before the next European Parliament elections in 2024 underscores the Commission's commitment to a more integrated and robust European financial architecture.
Overall, this will further preserve financial stability, protect taxpayers and depositors, and support the real economy and its competitiveness.
The proposal has the following objectives:
- Preserving financial stability and protecting taxpayers' money - The proposal facilitates the use of deposit guarantee schemes in crisis situations to shield depositors (natural persons, businesses, public entities, etc.) from bearing losses, where this is necessary to avoid contagion to other banks and negative effects on the community and the economy. By relying on industry-funded safety nets (such as deposit guarantee schemes and resolution funds), the proposal also better protects taxpayers who do not have to step in to preserve financial stability. Deposit guarantee schemes can only be used for this purpose after banks have exhausted their internal loss absorption capacity, and only for banks that were already earmarked for resolution in the first place.
- Shielding the real economy from the impact of bank failure - The proposed rules will allow authorities to fully exploit the many advantages of resolution as a key component of the crisis management toolbox. In contrast with liquidation, resolution can be less disruptive for clients as they keep access to their accounts, for example by being transferred to another bank. Moreover, the bank's critical functions are preserved. This benefits the economy and society, more broadly.
- Better protection for depositors - The level of coverage of €100,000 per depositor and bank, as set out in the Deposit Guarantee Scheme Directive, remains for all eligible EU depositors. However, today's proposal harmonises further the standards of depositor protection across the EU. The new framework extends depositor protection to public entities (i.e. hospitals, schools, municipalities), as well as client money deposited in certain types of client funds (i.e. by investment companies, payment institutions, e-money institutions). The proposal includes additional measures to harmonise the protection of temporary high balances on bank accounts in excess of €100,000 linked to specific life events (such as inheritance or insurance indemnities).
The European Commission's Communication on the review of the crisis management and deposit insurance (CMDI) framework is a significant step towards reinforcing and completing the Banking Union. Established in response to the financial crises that shook the global economy and the Eurozone, the Banking Union was designed to enhance financial stability across the EU. It aimed to support economic growth, competitiveness, and to address new challenges such as digital and green transitions, and geopolitical tensions.
The Banking Union stands on two operational pillars: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), both of which have significantly increased the resilience of the EU banking sector. However, the third pillar, a common deposit protection scheme, has yet to be fully realized due to a lack of political consensus.
The Commission's review, initiated by the December 2020 Euro Summit's call for a comprehensive plan to complete the Banking Union, underscores the importance of strengthening the CMDI framework. This initiative is not just a response to past financial crises but a preemptive measure against future vulnerabilities, as recently evidenced by banking crises outside the EU.
The CMDI reform aims to enhance how the EU manages bank failures, focusing particularly on smaller and medium-sized banks. These institutions have posed unique challenges in terms of depositor confidence and financial stability, often leading to a reliance on public funds—a situation the reform seeks to avoid. By clarifying the public interest assessment for crisis management, facilitating the use of Deposit Guarantee Scheme (DGS) funds in crisis resolution, and ensuring a harmonized approach across Member States, the proposal aims to make the banking sector even more robust.
An integral part of making the CMDI framework more effective is the establishment of a common deposit insurance scheme (EDIS). This scheme would not only provide a safety net for depositors across the Banking Union but also ensure a level playing field and avoid market fragmentation. Despite the technical and political challenges that have stalled EDIS negotiations for years, the Commission's communication reiterates the urgency and importance of reaching a political agreement on EDIS to complement the CMDI reforms.
In conclusion, the Commission's proposal to reform the CMDI framework, along with the push for EDIS, marks a critical effort to complete the Banking Union. By enhancing the mechanisms for crisis management and deposit insurance, the EU aims to bolster financial stability, protect depositors and taxpayers, and ensure that its banking sector can face future challenges with greater resilience. The call for swift agreement on these reforms before the next European Parliament elections in 2024 underscores the Commission's commitment to a more integrated and robust European financial architecture.
