Committee MEPs aim at paving the way to a deposit insurance at the EU level

MEPs adopted a proposal for the first stage of a European Deposit Insurance Scheme, operating as a liquidity scheme and providing loans to participating deposit insurance schemes.

The Economic and monetary affairs committee adopted the text with 26 votes to 18, with 3 abstention is a clear signal that MEPs want to complete the Banking Union and make progress towards a full insurance scheme across the EU. In the first stage, deposit guarantee schemes (DGS) would be shielded against local shocks while the loss covering European Deposit Insurance Scheme EDIS remains the goal for a later stage.

The new rules would only apply to banks, which are members of participating DGSs.

In order to limit the liability for the European Deposit Insurance Fund and to reduce moral hazard at the national level, assistance from the Deposit Insurance Fund can only be requested if the participating DGS has raised ex-ante contributions as required under the directive on deposit guarantee schemes.

Deposit Insurance Fund

The Deposit Insurance Fund (DIF) is an essential element of the EDIS I proposal, it would provide liquidity support, where the available financial means of a DGS are used for payout, in the event of a bank’s resolution, for preventive or alternatives measures. The proposal also establishes the powers of the Single Resolution Board (Board) for using and managing the DIF, which would be financed from transfers by participating DGSs. The target level of the DIF should reach 50% of the target level of the national DGS after three years.

In order to ensure fair and harmonised contributions for participating banks and provide incentives to operate under a less risky model, both contributions to EDIS I and to participating DGS should be calculated on the basis of covered deposits and a risk-adjustment factor per bank.

How it would work

In cases where the DIF funds are insufficient to provide the amount of liquidity support to a participating DGSs, all other participating DGSs should be obliged to lend to the DIF upon request from the Board. This mandatory lending would be capped at 30% after the 3-year build-up period of the DIF.

The liquidity support provided by the DIF would have to be paid back by a DGS within six years, according to repayment plan. No interest would be charged for any liquidity support up to DGS contributions to the DIF. However, to ensure incentives for repayment an interest is charged and progresses for amounts exceeding these contributions.

The Board should ensure that the contributions are transferred and spread out in an evenly manner. In the case that a participating DGS does not have sufficient financial means, the Board could defer the transfer of contributions to the DIF in six years at the most. It would be the legal responsibility of the participating DGS to meet and maintain both the target level of the DGS and the DIF.

In order to ensure availability of liquidity support from the entry into force of the rules, MEPs proposed that a proportionally higher amount of funds in participating DGSs should be available for mandatory lending during the 3-year build-up period of the DIF. They also want the member states to develop ways of enhancing the borrowing capacity of the DIF, including from financial markets.

Finally, MEPs expect that the Commission should review the appropriateness of extending EDIS I from providing liquidity support to a full insurance scheme with loss coverage and make associated legislative proposals which would result in the final completion of the Banking Union.

Next steps

The file will be followed up by the new Parliament after the 6-9 June European elections.