A European Deposit Insurance Scheme: key features and the way forward

• Author: Dobkowitz, Sonja; Evrard, Johanne; Carmassi, Jacopo; Silva, André; Parisi, Laura; Wedow, Michael
• Pages: 10-15

ECB Occasional Paper Series No 208 / April 2018

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3 A European Deposit Insurance Scheme:

key features and the way forward

In November 2015 the European Commission presented a proposal to establish an

EDIS as the third pillar of the banking union.9 EDIS would be set up in three stages:

first, for three initial years from July 2017 to July 202010, a reinsurance scheme

would cover up to 20% of the liquidity shortfall11 and up to 20% of the excess loss12

of a participating DGS whenever payouts and losses exceed the DGS’s available

financial means. The liquidity would be provided by means of a loan which the DGS

has to pay back, while the reinsured part of the excess loss, i.e. 20%, would not

have to be paid back. Furthermore, in order to limit moral hazard, the reinsurance

funding would be capped at 20% of the DIF’s initial target level or ten times the

target level of the insured DGS, whichever is lower. In addition, the benchmark for

calculating whether and to what extent a DGS can access the EDIS during the re-

insurance phase is the hypothetical level of liquidity the DGS should have if it had

complied with all its obligations (e.g. collecting ex ante contributions to reach the

target level), and not the actual level of liquidity in a DGS. Finally, other sources

available to the DGS (e.g. raising short-term ex post contributions) have to be tapped

before resorting to EDIS and the SRB is mandated to monitor the way the DGSs

pursue their claims during insolvency proceedings. During the reinsurance stage,

banks' risk-based contributions to the DIF would be calculated with reference to the

national banking system, i.e. relative to the riskiness of banks in the same country

and not of all banks in the banking union.

In the second stage, for four years after the end of the reinsurance stage and until

July 2024, a co-insurance scheme would be set up where the DIF would cover a

gradually increasing share (20% in year 1, 40% in year 2, 60% in year 3, 80% in year

4) of the liquidity needs and losses of participating DGSs. Co-insurance would kick-in

“as of the first euro”, so independently of the national DGSs’ resources being

exhausted. As it is the DGS which has the claim against the DIF (as opposed to

depositors or banks), any payout would be channelled through the national DGS.

While the liquidity provided to the DGS would have to be repaid, this is not the case

for the covered loss, which would be shared pro rata between the national DGSs and

DIF in line with the gradually increasing coverage ratio. No cap would be provided for

the amount due by the DIF. During the co-insurance stage, and differently from the

9 Proposal for a Regulation of the European Parliament and Council amending Regulation (EU)

806/2014 in order to establish a European Deposit Insurance Scheme.

10 To note, due to delays in the on-going negotiations, the timeline foreseen by the Commission is not

expected to be met.

11 According to the C ommission proposal, the liqui dity shortfall is the amount of c overed deposits in the

failing bank which exceeds the total available financial means in the DGS (i.e. under the DGSD,

available funding plus extraordinary contributions that the DGS can raise within 3 days of the payout

event).

12 The excess loss is t he loss remaining once the insolv ency procedure is over (after r ecovery) and

long-term ex-post contributions have been called.