Non-technical summary

• Author: Dobkowitz, Sonja; Evrard, Johanne; Carmassi, Jacopo; Silva, André; Parisi, Laura; Wedow, Michael
• Pages: 3-5

ECB Occasional Paper Series No 208 / April 2018

3

Non-technical summary

This paper provides fiveanalytical contributions to the discussion on the

establishment of a European Deposit Insurance Scheme (EDIS). First, the exposure

of a fully mutualised EDIS to bank failures1is estimated, examining how the

European Deposit Insurance Fund (DIF), with a target size of 0.8% of covered

deposits of participating banking systems, would be affected under different stress

and bail-in scenarios as well as under different methodological assumptions.

Second, the paperprovides a quantitative analysisof how the calibration of deposit

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

distribution of contributions across countries and banks. Third, the paperinvestigates

how the collection of contributions would be spreadacross small, medium and large

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

systematic cross-subsidisation between banking sectors in different Member States,

also taking into account potential country-specific shocks. Finally, a mixed deposit

insurance scheme, with national funds bearing the first burden and a European fund

intervening only afterwards, is tested to investigate its potential implications for

contributions and cross-subsidisation.

This paperfirst focuses on a fully-fledged EDISwith a target level of 0.8% of covered

deposits of the participating banking systems. The analysis is based onBankscope

data as well assupervisory data for 2015:Q4on covered deposits and balance sheet

indicators to estimate EDIS exposure to bank failures and contributions to EDIS at

bank level. The conclusions of the analysis are therefore based on the assumption

that banks’ balance sheet structures remain the sameuntil EDIS has been fully

introduced. The sample scrutinised comprises 1,675 euro area banks with total

assets of €22.14 trillion, representing approximately 75% of total assets of credit

institutions in the euro area, and €4,744 billion of covered deposits, corresponding to

approximately 83% of covered deposits in the euro area. The sample can be

considered as representativeat the euro area level, both in terms of total assets and

covered deposits.2The target size of the DIF for the sample is approximately

€38billion.

The exposure of EDIS is measured for banking crises of a different magnitude,

where the riskiest 3% or 10% of banks fail simultaneously according to their

estimated probabilities of default, in combination with different magnitudes of loss

severity3, ranging from 5% to 25% of total assets in resolution and between 7.5%

and 37.5% in insolvency, and two variations of banks’ loss-absorbing capacity. The

results indicate that a fully-funded DIF would be sufficient to cover payouts even in

very severe crises - even more severe than the 2007-2009 global financial crisis. It

should be stressed that the loss scenarios used for the analysis are extremely

1The term “EDIS exposure” refers to the potential need for an EDIS intervention in case ofa bank

failure.

2The degree of representativeness of the sample at country level is, however, heterogeneous.

3 Losses in i nsolvency are assumed to be always 50% higher than losses in resolu tion.