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Resilience of the EU financial sector in the global context - Towards a EU DGS?

The Commission´s proposal on a European Deposit Insurance Scheme

By Pearson Patrick - Head of Resolution and Crisis Management Unit, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission

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The European Union has improved the functioning of Deposit Guarantee Schemes (DGS) since the crisis, but a more integrated system is still necessary, as it would enable a greater diversification of risk that would benefit the stability of all countries and better support depositor confidence. As a consequence, the Commission proposed on 24th November 2016 a regulation to establish a European Deposit Insurance Scheme (EDIS) as the third pillar of a Banking Union, alongside arrangements for banking supervision and resolution.

EDIS will provide a much higher level of protection for each participant bank than any single national scheme since it will be financed by all banks across the Eurozone. Moreover, it would support financial stability by further reducing the link between banks and their national sovereigns.

EDIS would progressively evolve into a fully mutualised scheme in three successive stages by 2024. During the reinsurance phase (2017-2020), the national DGSs would have to be exhausted first before EDIS could be used. EDIS would only provide an additional source of funding to that of the national schemes, thereby only weakening the link between banks and their sovereign to a limited extent. For this reason, the reinsurance phase would be followed by a progressive mutualisation of deposit insurance cover during the co-insurance phase (2020-2024). To avoid moral hazard, the EDIS proposal contains various safeguards. For instance, in the first two phases the national scheme has to comply with the obligations of the DGS Directive, in particular with regard to the required annual target levels, before receiving any extra support by EDIS. The full insurance of depositors would fall under EDIS from 2024 onwards.

EDIS will provide a much higher level of protection for each participant bank than any single national scheme since it will be financed by all banks across the eurozone.

It is important to note that the EDIS proposal is part of wider package of risk reduction and risk sharing measures that are also designed to break the bank-sovereign link. The EDIS proposal is therefore accompanied by a Communication, which discuss further possible measures such as a common fiscal backstop, further elimination of national options and discretions under relevant legislations and consideration of the appropriate prudential treatment of banks’ sovereigns’ exposures. The implementation of both the EDIS proposal and the risk-reduction measures should be promoted in parallel.