Proposal for a European Deposit Insurance Scheme

Transcription

1 FINANCIAL REGULATION Proposal for a European Deposit Insurance Scheme María Abascal, Rosa Gómez and Lucía Pacheco A plan to complete the unfinished banking union On 24 November, the European Commission released a legislative proposal outlining the road-map towards common European deposit protection, to be achieved by The proposal envisages three stages: i) until 2020, a system of reinsurance; ii) progressive mutualisation through a system of coinsurance until 2024, and iii) full mutualisation with a common European Deposit Insurance Scheme () by This move constitutes an ambitious step in the right direction towards a fully-fledged banking union. A European system for deposit insurance has been the neglected pillar of the banking union. Although it was first included in the original version of the Four Presidents Report in June 2012, a common was soon dropped from the official agenda. The final version of the Report endorsed in December only called for a quick adoption of the new Deposit Guarantee Scheme (DGS) Directive intended to strengthen and harmonise national DGSs. Three years later, the Five Presidents Report 1 brought the debate back on the table, this time under a staged and more pragmatic approach. The rationale for a European Deposit Insurance Scheme A lot has already been achieved with the current setup of the banking union in terms of reduced financial fragmentation and a weaker link between banks and their sovereigns. Yet, as long as Deposit Guarantee Schemes (DGSs) remain purely national this vicious circle is not completely broken and therefore Member States continue to be exposed to risks in their banking sectors. Therefore, the establishment of a truly common is an indispensable element to complete the Banking Union and finally put an end to the bank-sovereign doom-loop. A European Deposit Insurance Scheme would strengthen the European financial safety net, overcoming weaknesses associated with the current system of national DGSs, which remains vulnerable to local systemic crises. Furthermore, it ensures that the same level of deposit protection is effectively guaranteed across countries, and also reduces the cost of deposit insurance by increasing the diversification of risks and by raising funds over a larger pool of institutions. From the perspective of the European institutional architecture, a common is the perfect counterpart to single banking supervision and resolution, and it can contribute to mitigate the complexity of the current banking union framework, which combines national and European elements. Having said that, deposit protection at EU level could generate moral hazard risks, given that, if not properly designed, it could discourage national efforts to monitor and control risks in the banking sector. Nevertheless, after the establishment of the Single Supervisory Mechanism, risk monitoring of banks at the eurozone level has undoubtedly been reinforced by the direct and indirect supervision of the ECB. 1: See related BBVA Research Watch: 1 / 6

2 Building a in three stages The endgame of the Commission s proposal is a fully mutualised, which will co-exist alongside national schemes. This would be achieved in three sequential stages: i. From 2017 until 2020, the Commission proposes that would initially be based on a system of reinsurance at European level for national schemes. In this initial phase, the would provide limited liquidity assistance and cover 20% of the excess losses of the national DGS up to a specified limit (the minimum of 20% of its initial target level or 10 times the target level of the national DGS). Access to would be made conditional on compliance by the national DGS with the DGS Directive, including with the required ex-ante funding levels, and would only be possible once the national fund has been depleted. The purpose of this design is threefold: i) it limits moral hazard problems at the national level, ii) it recognises the divergences in the initial capitalisation levels of the existing national schemes, and iii) it provides incentives for Member States to continue building up their national DGSs. ii. iii. From 2020, the reinsurance evolves into a system of coinsurance under which the pay-outs would be shared from the first euro by the European and national funds. The share of the loss that will be borne by the European fund will increase at a 20% annual rate until 2024, with no caps on the provision of funding or loss to cover by. Also in this stage, recourse to the will be made conditional on full compliance with EU rules by national schemes, and the national DGSs are bound to re-pay all funds from insolvency proceedings or banks contributions received ex post. The endgame, a fully mutualised, would be operational by After this point, would cover all losses in the event of a pay-out or a resolution procedure. Having said that, national DGSs will still continue to exist after 2024, acting as administrators of pay-out procedures and as the point of contact for depositors and institutions in each Member State. Figure 1 Building an in three stages: reinsurance, coinsurance and full insurance Stage 1: REinsurance ( ) used only after national DGS depleted covers excess losses up to a limit Stage 2: COinsurance ( ) contributes from first euro of loss Progressive mutualisation Stage 3: FULL insurance (2024) provides full insurance 100% mutualisation Nat. DGS Only after national DGS empty Nat. DGS Depositors Source: BBVA Research 2 / 6

3 % of covered deposits Financial Regulation Flash Main principles and features Scope: The scope of the would coincide with that of the Single Supervisory Mechanism (SSM). Thus it would be mandatory for all eurozone Member States and open to non-eurozone countries willing to join the banking union. Participating institutions: all institutions from Member States participating in the SSM would contribute to funding the, irrespective of their size and relative significance. Financing: would be privately funded through ex-ante contributions raised from banks. An important consideration is that the new scheme is not meant to increase the overall cost for the banking sector. Instead, the contributions paid by banks to the would be deducted 2 from their contributions to national DGSs, the latter being reduced as contributions to increase. Target levels: The initial target level of the Deposit Insurance Fund, to be progressively reached at the end of the reinsurance stage, will be an amount equal to the 20% of four ninths of the sum of the minimum target levels of all DGSs from participating Member States. The final target level, to be reached at the end of the co-insurance period, will be equal to the sum of all the minimum target levels, that is, a 0.8% of covered deposits. Figure 2 Funding path of and participating DGSs 0,8 0,7 0,6 0,5 0,4 0,3 20% 36% 52% 68% 84% 100% 0,2 20% 20% 0,1 0,0 July 2017 July 2018 July 2019 July 2020 July 2021 July 2022 July 2023 July 2024 Participating DGS Source: BBVA Research based on EC s Regulation Proposal Risk-based contributions: Banks ex-ante contributions to would be calculated based on covered deposits, adjusted to take into account the risk attributes of each bank, to meet a target level of 0.8% of covered deposits of all banks in the SSM by During the first three years, the re-insurance stage, the risk profile of each bank relative to the national banking system would be considered, while in the latter stages the risk profile relative to all banks in the banking union would be taken into account. These contributions would be determined annually according to a methodology that the Commission will develop in two separated Delegated Acts, one for the reinsurance phase and one for 2020 onwards. 2: In case the MS/DGS chooses to apply full compensation. 3 / 6

4 Coverage: From the first stage, the new Deposit Insurance Fund is intended to provide: i) funding to a national DGS in the event of a liquidity shortfall, and ii) loss-coverage. Both interventions could be derived from a pay-out event (the DGS to reimburse depositors in the case of the liquidation of a bank) or from the contribution of the DGS to the resolution. But the level of coverage provided by the will be very limited in the first stage and will increase gradually up to full coverage in Governance: The responsibility of managing the would fall under the remit of the Single Resolution Board (SRB). The process of advancing towards full deposit insurance mutualisation mirrors the design of the Single Resolution Fund (SRF), and therefore can leverage on the experience gained by the SRB. However, it would be necessary to amend the governance structure of the Board to avoid any potential conflicts of interest with its resolution functions. Figure 3 Essential principles for developing an Source: BBVA Research Further measures to reduce remaining risks and strengthen the banking union The Commission's proposal is accompanied by a Communication which sets out other concrete measures to further reduce remaining financial stability risks in the banking union. In parallel with the establishment of by 2024, the Commission intends to make good progress in: i) ensuring full transposition by Member States of existing legislation in this field, such as the Directives on Bank Recovery and Resolution and on Deposit Guarantee Schemes. Infringement proceedings against the relevant Member States that have failed to implement them on schedule are ongoing; ii) reduce remaining national options and discretions for banking prudential rules to reinforce the single rulebook; iii) further reduce the possibility of resorting to taxpayers for failing banks (implement TLAC requirement for G-SIBs by 2019); iv) further convergence of insolvency laws as set out in the Capital Markets Union Action Plan, and v) implementation of the remaining elements of the regulatory framework agreed at international level (measures to limit bank leverage, to assure stable bank funding, to improve the comparability of risk-weighted assets and to revise the treatment of banks' exposures to sovereign risks). 4 / 6

5 Assessment The proposal brought forward by the European Commission represents a milestone, as it lays down the steps towards a single deposit protection in Europe by Having a fully mutualised, up and running by 2024, is an ambitious and most welcome goal that completes the banking union, helping to definitively break the link between banks and their sovereigns. In this way, it will be ensured that bank deposits up to EUR100,000 are equally guaranteed, no matter which bank or country they are in, mitigating the risk of deposit runs and contributing to financial stability. The gradual approach proposed is a pragmatic one and could be effective in achieving a common in the medium term. Even if the reinsurance system envisaged for the first stage does not represent a significant improvement over the current system of national DGSs, due to its limited coverage, we consider that it could play a positive role in the path proposed by the Commission. Setting up the core elements of the, the Deposit Insurance Fund and the Board responsible for its governance, will strengthen the European institutional framework and facilitate the transition to a common. The parallel measures announced by the Commission are welcome, particularly those aimed at strengthening the pillars of the banking union (single rulebook, single supervision and resolution). But measures linked to ongoing work by global standard setters (e.g. limits to leverage or to sovereign risk) should be aligned as much as possible, with regard to both calendars and content, with those initiatives to promote global consistency Furthermore, there are still some areas where further work is needed. The main missing element in the proposal would be the establishment of a common fiscal backstop to be used as a last resort and to ensure the credibility of the whole system, even if the new European resolution framework limits to a great extent the probability of having to resort to DGSs. As in the case of the Single Resolution Fund, this is a politically difficult, albeit necessary, element. Other issues that should be clarified in the near future are the methodology for calculating the contributions and how to deal with the lack of harmonisation of national insolvency legislations. Still, the Commission s proposal is probably going to be followed by an intense political debate in the next months, especially given the well-known German opposition to the idea of increased mutualisation of banking risks and also due to its close link with a fiscal union. 5 / 6

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