Risk-based contributions to EDIS

AuthorDobkowitz, Sonja; Evrard, Johanne; Carmassi, Jacopo; Silva, André; Parisi, Laura; Wedow, Michael
ECB Occasional Paper Series No 208 / April 2018
5 Risk-based contributions to EDIS
5.1 Rationale
One concern which is frequently voiced regarding EDIS relates to the possibility that
the pooling of resources could lead to cross-border subsidies, i.e. the eventuality of
one or several banking systems structurally contributing more and benefitting less
from the scheme than other, potentially riskier, systems. The pooling of resources
could also lead to increased moral hazard and incentivise risk-taking behaviour by
banks given the existence of a larger deposit guarantee scheme and fund. There
might also be the risk that certain banking systems would be more likely to tap into
the EDIS funds than others, even though all banking systems would benefit from the
enhanced capacity of the deposit scheme to withstand larger crises.
The post-crisis review of the European Deposit Guarantee Scheme Directive
(DGSD) applied the concept of risk-based contributions to national DGSs.32 The
Commission proposal on EDIS also foresees the use of risk-based contributions to
the DIF, the methodology of which would be determined in a Commission Delegated
Act. The use of a “Banking Union methodology”, i.e. a methodology comparing
banks across the banking union rather than within each national banking system,
would have the potential to reduce the risk of cross-border subsidies compared to a
system where banks’ contributions would be calculated only relative to their national
peers. This is because, following a “polluter-pays” principle, a national banking
system would contribute more to the DIF overall if it is riskier relative to other
banking systems in the banking union. This approach would have the benefit of
aligning incentives and tackling moral hazard, since banking systems which include
riskier banks would contribute more to the DIF overall than they would if
contributions were solely based on the amount of deposits or calculated only taking
into account the riskiness of banks within the national banking system.
5.2 Methodology
Given that the exact methodology for the calculation of banks’ contributions to the
DIF is yet to be developed, the analysis below is based on a modified version of the
methodology developed by the EBA for national DGSs in which banks’ contributions
are risk-based.33 It must be stressed that, while the EBA methodology for national
DGSs applies the risk adjustment at a national level, the risk adjustment in this
analysis is carried out at the banking union level.
According to the EBA Guidelines, the calculation of an institution’s contribution is
based on five risk categories: (1) capital, (2) liquidity and funding, (3) asset quality,
33 See EBA Guidelines on methods for calculating contributions to deposit guarantee schemes to be
found here : Guidelines.
ECB Occasional Paper Series No 208 / April 2018
(4) business model and management, and (5) potential losses for the DGS (this
factor is not considered in this analysis due to limited data on unencumbered
assets). For the purpose of this study, the leverage ratio and the total risk-based
capital ratio are included for category (1), liquid assets per total assets34 are included
for category (2), and the Return On Equity (ROE) and Risk Weighted Assets (RWA)
per total assets are used for the category representing an institution’s business
model and management (4). Furthermore, the analysis includes a measure of (part
of) MREL-eligible liabilities.35 The higher the MREL, the higher the likelihood of a
bank going into resolution rather than liquidation, the higher the bank's expected
capacity to absorb losses and, all else being equal, the lower the potential exposure
for EDIS.36 The combination of these indicators shall hereinafter be referred to as
“DGS-baseline indicators” and is comparable to the list of indicators proposed for
EDIS. As these indicators are still under discussion, the set used here does not
prejudge the final calculation method that will be decided by the Council of the EU
and the European Parliament. In a first modification of the baseline list of indicators,
the indicator for MREL-eligible liabilities is excluded to test the impact of this
indicator on the contributions. In a second modification, the established baseline set
of indicators is extended by additionally including an indicator for interconnectedness
measured as the sum of loans and advances from and to banks relative to the total
amount of these items in the sample. The non-performing loans ratio (category (3)) is
not included in the baseline analysis because of data limitations. However, it is
reported separately in column 7 in Table 3, where it is added to the baseline
indicators to indicate its potential relevance for the purpose of future analyses.
Finally, the established baseline indicator set is extended by including the World
Bank index for the strength of insolvency frameworks, since the proper functioning of
the insolvency framework will have an impact on the deposit insurance's capacity to
recover money in insolvency after a payout.37
The EBA Guidelines suggest two alternative approaches to constructing aggregate
risk weights (ARW) that are used in the contribution calculation: a bucket approach
and a sliding scale approach. The results presented are those for the sliding scale
approach, since this approach requires fewer assumptions and uses a normalisation
method that is better suited to preserving the level of information of the indicators.38
The 25th and 75th percentiles are used as lower and upper boundaries,
34 Defined as: (Cash & balances with central banks + Net loans and advances to banks + Level 1 assets
(fair value hierarchy)) / Total Assets.
35 Senior unsecured bonds only: regulatory capital is not included to avoid double consideration, given
that it is already used for category (1) on capital.
36 The EDIS exposure could be lower for several reasons: for example, MREL-eligible liabilities cannot be
suddenly withdrawn, e.g. in a run, because they must have residual maturity of at least one year;
losses in inso lvency tend to be higher than in resolution; th e losses for the deposit guarantee scheme
in resolution cannot be higher than in insolvency (see Article 109 of the BRRD and Article 79 of the
37 See Resolving Insolve ncy
38 See OECD and JRC (2008). The construction of the composite risk i ndicator is a crucial to pic in the
calculation o f risk-based contributions as contributions strongly depend on the choice and design of the
various steps tak en to calculate the ARW. The aforementioned work of the OECD and JRC gives an
insightful overview of indicator construction in general.

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