Introduction

• Author: Dobkowitz, Sonja; Evrard, Johanne; Carmassi, Jacopo; Silva, André; Parisi, Laura; Wedow, Michael
• Pages: 6-7

ECB Occasional Paper Series No 208 / April 2018

6

1 Introduction

On 24 November 2015, the European Commission published a proposal for a

European Deposit Insurance Scheme (EDIS).The appropriateness of the Deposit

Insurance Fund's (DIF) target size – in the proposal, 0.8% of covered deposits, as

already envisaged for national deposit guarantee schemes – is one crucial aspect of

the design of the scheme. In addition, the distribution of risk-based contributions

across different types of banks and the possibility of a reduction of contributions for

specific types of banks is a subject of discussion.Some of the concerns raised upon

the publication of the proposal were that the EDIS would lead to unwarranted

cross-subsidisation, i.e. banking sectors in one Member State would have to pay for

bank failures in other Member States.5

This paper investigates the validity of these concerns byfirstassessing the

exposure6of a fully mutualised EDISwith a target level of 0.8% of covered deposits

of the participating banking systemsto bank failures under different stress and bail-in

scenarios.Second, the paper provides a quantitative analysis of how the calibration

of risk-based contributions (based on current banks’ risk profiles) affects the

distribution of contributions across countries and banks.Third, we show how the

collection of contributions would be distributed across small, medium and large

banks. Fourth, the analysis aims to investigate whether EDIS would produce any

systematic cross-subsidisationbetween banking sectorsin different Member States,

also taking into account hypothetical country shocks. Finally, the paper compares the

results on contributions and cross-subsidisation under a fully mutualised EDIS with a

"mixed" deposit insurance scheme, composed of national compartments with a

target level of 0.4% of domestic covered deposits - intervening first - and a European

compartment with a target level of 0.4% of euro area covered deposits - intervening

only after the national compartment is depleted.

The analysis is based ontwo stepsfor both the fully-fledged EDIS and the mixed

deposit insurance system. In the first step,the exposure of EDIS to bank failures is

calculated using covered deposits as well as banks’ estimated probabilities of default

(PD), loss given default (LGD) and banks’ loss-absorbingcapacity. Crises of different

magnitudes are considered where the riskiest 3% or 10% of banks fail

simultaneously according to their estimated PDs in combination with different

magnitudes of loss severity (LGD)7and two variations of banks’ loss-absorbing

capacity. This first step makes it possible toassess the resilience of EDIS to

potential loss scenarios of different severity and under different assumptions on loss

absorption by banks’ liabilities.In a second step, banks’ contributions to EDIS are

5In its June 2016 Conclusions, the Economic and Financial Affairs Council (Ecofin) agreed that political

negotiations on EDIS would start as soon as sufficient further progress had been made on a set of

measures to re duce risks in the banking system.

6The term “EDIS exposure” refers to the potential need for an EDIS intervention in case of a bank

failure. It is calculated, first, as losses minus loss-absorbing capacity at bank level and, second,

summed up for all banks.

7Losses in insolvency are assumed to be always 50% higher than the losses in resolution.