From the European Commission comes the third and last pillar for the European banking union, the project approved three years ago. After the common supervision and the single resolution it is now the turn of the third pillar: the introduction of the single deposit insurance scheme (Edis).
Edis' goal is to create a single fund for all European banks to turn to to protect accounts under €100.000 in the event of the resolution of a crisis bank and bail-in activation, the mechanism that provides for the participation in the rescue of the institute by shareholders and account holders. But in this eventuality, current account holders with current accounts of less than 100.000 euros will be protected by the common fund. The definitive entry into force of the single fund, financed with the resources of European banks, is scheduled for 2024 and in the first years a State will be able to draw on it when its national protection fund will not be sufficient.
"We have chosen a balanced approach, where risk sharing goes hand in hand with risk mutualisation, so those who are worried will understand when they see the proposal that everything is balanced and progressive" said the financial services commissioner Jonathan Hill presenting the proposal for a single scheme for deposit insurance. “I don't think we need to go straight towards mutualisation without first rebuilding trust, which is currently low.” Therefore, we need to “decrease the risk, and the best way is to do it step by step and address the concerns of the skeptics” concludes Hill.
European deposit insurance scheme: what it provides
The new deposit protection scheme, unveiled today by the European Commission, will have the following characteristics:
- will be based on the system currently in force based on national guarantee schemes;
- account holders will have the same current protection, they will have a protected current account up to the sum of 100.000 euros;
- it will basically be cost-neutral for the banking sector because the contributions owed by banks to EDIS will be able to be deducted from their contributions to national deposit guarantee schemes;
- the amount of the contribution requested from individual banks will be calculated based on the risk of the bank itself: the banks most at risk will pay a higher contribution;
- will only insure national deposit guarantee schemes which comply with EU standards and are established on the basis of these standards;
- will be accompanied by a communication containing measures to reduce the risks;
- it will be mandatory for the member states of the Eurozone whose banks are currently covered by the Single Supervisory Mechanism, but open to other Member States wishing to join the Banking Union.
European deposit insurance scheme: three stages
The phases that will lead to the activation of the single deposit guarantee system and its financing by European banks, there are three:
phase 1: "reinsurance" with a three-year duration, until 2020. In this phase, national deposit guarantee funds can access Edis but only when they have exhausted their national resources, and only if they are up to date with the established contribution level. And in any case, in the first few years, Edis will only intervene up to a certain level.
Phase 2: "co-insurance" until 2024. The mutual fund intervenes, with 20%, as soon as there is a need to repay the account holders. Edis thus becomes a system of progressive mutualization, still subject to some limitations useful to avoid abuse. This second phase marks the beginning of the era of "risk sharing" much opposed by Germany.
Phase 3: “total reinsurance” starting in 2024. The share of risks assumed by EDIS will gradually increase to 100%, when EDIS will fully insure national deposit guarantee funds.
