Conclusions

• Author: Dobkowitz, Sonja; Evrard, Johanne; Carmassi, Jacopo; Silva, André; Parisi, Laura; Wedow, Michael
• Pages: 48-50

ECB Occasional Paper Series No 208 / April 2018

48

7 Conclusions

The analysis in this paper provides five main insights which support the policy

discussion on the introduction of a European Deposit Insurance Scheme.

First, a fully-funded deposit insurance fund with ex-ante contributions of 0.8% of

covered deposits (€38 billion in the sample analysed) would be sufficient to cover

payouts even in case of hypothetical losses much higher than the losses

experienced during the last crisis (2007-2009). Considering a scenario where the

riskiest 3% of euro area banks fail simultaneously and only MREL-eligible liabilities

are bailed-in (with the exception of large corporate deposits above €100,000), losses

in resolution and insolvency up to, respectively, 15% and 22.5% of banks’ total

assets are not enough to create exposures of the DIF in any country. The same

conclusion is reached when considering a scenario where the 10% riskiest banks in

the euro area simultaneously fail and are all affected by losses in resolution equal to

5%, 10% and 15% of total assets (corresponding to 7.5%,15% and 22.5% losses in

insolvency). These loss scenarios are considerably more severe than historical

losses both in Europe and in the United States, including the recent global financial

crisis. Exposures of the DIF are triggered only in case of an extremely severe crisis,

where the 3% or 10% riskiest banks simultaneously fail and are all affected by losses

in resolution at least equal to 20% of total assets, (corresponding to losses in

insolvency of 30%). Even in this extreme case, however, the DIF is never depleted.

Second, the specificities of banks and, as a result, also of banking systems can be

taken into account in the risk-based contributions to the deposit insurance fund,

which is preferable to the lowering of the EDIS target level. The methodology used in

this paper follows the EBA Guidelines for national DGS contributions but is applied to

all participating banks within the scope of EDIS to ensure that a bank’s risk profile is

compared to its peers across the entire banking union rather than only within each

national banking system. The features of banks and banking systems can be

appropriately reflected in the risk-based contributions using a “polluter pays”

approach. This would have the benefit of keeping the credible target level of EDIS,

which has been shown in Section 4 to be appropriate in dealing also with severe

banking crises. Furthermore, risk-based contributions would allow a wide range of

factors which are likely to have an impact on EDIS to be taken into account. For

example, including an indicator for MREL-eligible liabilities provides an indication of

banks’ loss-absorbing capacity and could also be a proxy for the likelihood of a bank

going into resolution rather than insolvency. Therefore, including this variable means

that banks that are likely to go into resolution may have their contributions reduced

because of their higher loss-absorbing capacities and the resulting potentially lower

exposure for EDIS. This could cater for the fact that a banking system composed of

larger institutions would be less likely to benefit from EDIS as these are more likely

to be resolved, thus limiting the possible contribution needed from the deposit

insurance fund. Also, the inclusion of an interconnectedness indicator would permit

the impact of a bank’s failure on the banking system as a whole, and therefore on