AuthorDobkowitz, Sonja; Evrard, Johanne; Carmassi, Jacopo; Silva, André; Parisi, Laura; Wedow, Michael
ECB Occasional Paper Series No 208 / April 2018
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 by first assessing the
exposure6 of a fully mutualised EDIS with a target level of 0.8% of covered deposits
of the participating banking systems to 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-subsidisation between banking sectors in 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 on two steps for 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-absorbing capacity. 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)7 and two variations of banks’ loss-absorbing
capacity. This first step makes it possible to assess 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
5 In 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.
6 The 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.
7 Losses in insolvency are assumed to be always 50% higher than the losses in resolution.

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