Completing banking union

Abstract

To complete banking union, there should be a single European deposit insurance scheme (EDIS) alongside the single supervisor and the single resolution authority. This would ensure uniformity across the Eurozone and facilitate the removal of barriers to the mobility of liquidity and capital within the single market. That in turn would promote efficiency in the banking sector and in the economy at large-just at the time that the EU needs to boost growth in order to remain competitive with the US and China. The EDIS promise to promptly reimburse insured deposits at a failed bank in the Eurozone should be unconditional. But who will stand behind that commitment? Who is the "E" in EDIS? Is its promise credible, even in a crisis? If a deposit guarantee scheme fails to deliver what people expect, panic would very likely erupt. Instead of strengthening financial stability, deposit insurance could destroy it. Yet this is the risk that current proposals pose. They create the impression that there will be a single deposit guarantee scheme. There will not. Instead, there will be a complex set of liquidity and reinsurance arrangements among Member State schemes. These defects need to be remedied. To do so, we propose creating a European Deposit Insurance Corporation (EDIC) alongside national schemes. For banks that meet EDIC's strict entry criteria and decide to become members, EDIC will promise to reimburse promptly-in the event the member bank fails-100 cents on the euro in euro for each euro of insured deposits, regardless of the Eurozone Member State in which the bank is headquartered. In effect, the single deposit guarantee scheme would be created via migration to EDIC rather than mutualisation of existing schemes. This would increase the mobility of capital and liquidity and lead to * SAFE policy papers represent the authors' personal opinions and do not necessarily reflect the views of the Research Center SAFE or its staff. The paper will be published as a chapter in "EDIS, NPLs, Sovereign Debt and Safe Assets", Andreas Dombret and Patrick S. Kenadjian, editors, Institute for Law and Finance Series, De Gruyter 2019.

Completing Banking Union? The Role of National Deposit Guarantee Schemes in Shifting Member States' Preferences on the European Deposit Insurance Scheme

“…They do provide a solid analysis of the risk‐centric debate on the initial 2015 proposal, but are less suitable for grasping banking sector interests and government positions linked to the institutional structure and legal status of national DGSs. On the policy side, many contributions argue against new EDIS drafts that preserve national DGSs (Cerrone, 2018; Schoenmaker, 2018; Huertas, 2019; Carmassi et al, 2018, 2020; Panetti, 2020). While their critiques provide strong arguments against moral hazard arising from a joint supranational fund, they too only address the risk reduction facet but fail to account for preferences on the institutional design of EDIS independent from risk reduction.…”