EU-Einlagensicherung bedroht Vielfalt im europäischen Bankensektor

The EU Deposit Guarantee Scheme Directive (DGSD, 2014/49/EU), which was to be transposed into national law by the beginning of July 2015, has legally enshrined the rights of depositors to EUR 100,000 in all Member States of the European Union (EU) as well as strict quality standards within the various systems. The current EU legal framework for deposit insurance, harmonised through the DGSD, ensures the same level of protection all over Europe.

The DGSD forms the third pillar of the Banking Union and, alongside the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), completes it. Depositors in all Member States are protected up to EUR 100,000. Hence, we face a harmonized European Deposit Guarantee Scheme (DGS)-landscape.

Not untypical for political discussions, Banking Union is subject to hugely different interpretations. A widespread perception is that Banking Union needs to be “completed” and that its current state is only a partial solution. This view appears to be rarely checked for accuracy as Banking Union is indeed complete from an economic perspective. Its third pillar is built upon the Deposit Guarantee Schemes Directive, which ensures a common depositor protection in every Member State according to the very same, harmonized requirements.

In order to achieve the alleged goal of increasing depositors’ trust in the stability of the financial system, it is not necessary to mutualise the funds into one deposit guarantee scheme. It is even better not to put all eggs in one basket to avoid contagion, if mistrust were to come back again.

The European Deposit Insurance Scheme (EDIS), as proposed by the EU Commission in November 2015 (COM(2015) 586 final) is not a tool of harmonization but of centralization. In sharp contrast to the DGSD, EDIS eliminates diversity and aspires unification through centralization without regard to costs.

Unlike EDIS, the DGSD allows for different approaches: By DGSD, European legislators have recognised the different approaches pursued by pay boxes or institutional protection schemes (IPSs), Article 4(2) DGSD. IPSs are designed to avoid institutions to go into insolvency and ensure that all business relationships with customers of a covered institution can be continued, thereby providing a much higher level of stability.

EDIS is not the right way forward. It does not provide for the integration of well-functioning systems and will consequently leave an important part of European depositors worse off.

The DGSD explicitly allows DGSs to use their funds for alternative measures in certain cases. EDIS (indirectly) eliminates this option without justification. This is not trivial, as it could mean the end for institutional protection schemes that are officially recognized as deposit guarantee scheme in accordance with the DGSD. Under EDIS, they will have to transfer all funds to a European fund. It is very doubtful that they will be able to raise lost funds a second time through additional contributions from their member institutions.

A defining quality of the EU banking sector is its profound diversity. Concerning regional banks, this diversity relies in a huge part on institutional protection schemes and network constructions. In contrast, the European Deposit Insurance Scheme does not take into account these differences.

It has been argued that EDIS has no negative effect on IPSs as they could be set up as a voluntary scheme next to the European DGS. Consequently, members of an IPS would be faced with a double burden, extinguishing IPSs in the end.

Proponents of the European Commission’s EDIS proposal argue that IPS membership could be “rewarded” by a reduced DGS contribution, thus leaving funds available to voluntarily support. This, however, would only work for DGSs and IPSs that are separated. But a number of IPSs, such as the one of the German Sparkassen (and the German cooperative banks as well), are indeed recognized under current legislation as a DGS at the same time. Transferring their existing funds to a mutualized system would eliminate the funds necessary to maintain a functioning IPS. Therefore IPSs, and in particular IPSs recognized as DGS, would become economically unviable under the EDIS proposal.

In the end, EDIS would eliminate existing IPSs and would have far-reaching consequences for financial stability as well as for local banking and banking market structures. It is, therefore, imperative to ensure the workability of IPSs recognized as DGSs into any form of dis-cussions about a European deposit protection system.

Apart from its irrevocably damaging effects on diversity, EDIS would have negative systemic impacts as well. An obvious one is the occurrence of moral hazard for policymakers in ignoring the effects of national economic policy on banking stability by mutualizing the resulting financial consequences.

But EDIS would also give rise to contagion risk as depositors become aware of the interconnectedness that is inherent to EDIS, ultimately leading to destabilising spillover effects.

A fully fledged EDIS would uncouple risk and accountability. Since higher-risk banking sectors will be backed by EDIS, they would be prone to favour riskier business models altogether. Banking sectors with lower-risk business models would implicitly support their competitors in other Member States.

Another word of caution, when looking at the discussion of a (statistical) reduction of non-performing exposures (NPEs): This should not mislead anyone to rush into EDIS. Legacy risks are not restricted to NPEs. It lacks a harmonized insolvency law within the EU. Moreover, a coerced European centralization could very well be the missing link that will allow risks to leap from one Member Sate to the other, endangering financial stability and trust.

Apart from the potentially severe implications of EDIS for diversity and for networks of regionally focused credit institutions, the issue of risk imbalances remains largely unaccounted for. It is of crucial importance to address the sovereign-bank nexus as reflected in the persisting home-bias present in banks’ sovereign risk portfolios. Deteriorations of sovereign debt have the potential to exercise severe pressure on banks’ capital positions, particularly when they are already faced with a high NPE ratio.

A fully mutualized EDIS will not prevent bank crises. This can only be achieved via sound and sustainable business models and a clear path to dealing with the risk weighting of sovereign exposures. A fully mutualized EDIS will create cross-border liability obligations without offering adequate possibilities of (risk) control.

Harmonized standards of depositor protection, level playing field, prevention of regulatory arbitrage, and enhanced stability of the banking system, all these objectives are already explicitly addressed by the DGSD.

The question remains if there is any net benefit to be expected from EDIS. The intended backstop mechanism for national shocks can also be reached by a system of mandatory lending. This is a much less invasive way to address this link between deposit insurance and a national fiscal budget. Such a construction would permit a DGS in a stressed liquidity situation to borrow from all other schemes. A system of mandatory lending could be implemented under the DGSD review which is due in 2019 anyway.

The European banking landscape is extremely rich and diverse, reflecting the EU’s motto “United in Diversity”. If this diversity of bank business models – ultimately leading to a more resilient overall financial system – were to be preserved, regulators need to take care not to overburden simple, small and medium-sized banks with their legislation. The principle of proportionality is key in this respect. Another element is network building to maintain economies of scale. Institutional protection schemes provide locally active credit institutions an overarching element for networks of independently governed credit institutions.

Enhancing trust and depositor protection within the framework of the Banking Union needs a well-conceived construction. A pure centralization of DGSs is not the adequate approach. Instead, mandatory lending or a construction of combined European and national facilities should be taken into consideration. Small and regional credit institutions, such as the German Sparkassen, have been making use of institutional protection for decades. Their IPS has more than 40 years of experience protecting depositors. To promote financial stability and to encourage local banking, EDIS must not eliminate existing IPSs.