How the European Deposit Insurance Scheme Can Provide Security to Europe’s Deposits and create a more competitive banking environment

By Jordan Simpson

This policy brief was written by Jordan Simpson for INRL20160 Introduction to EU Politics at University College Dublin during the 2024/25 academic year. The module asks students to identify a live problem on the EU agenda, weigh the options open to the Union, and set out concrete recommendations. The brief is reproduced here as submitted, and the views expressed are the author’s own.

Executive Summary

This policy brief outlines the European Deposit Insurance Scheme (EDIS) and examines its potential benefits in providing additional security for European deposits while fostering a competitive European banking environment. EDIS is intended as the final step in completing the Banking Union. The implementation of EDIS would create a more stable and integrated financial framework, ensuring consistent depositor protection across all EU member states.

Context and Importance

The Banking Union consists of three key components: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the European Deposit Insurance Scheme (EDIS). While the SSM and SRM are already operational, EDIS is yet to be implemented (Council of the European Union, 2023). The EDIS is a “euro-area wide insurance scheme for bank deposits” (European Commission, 2015). Its objective is to create a European-level deposit protection scheme, reducing the impact of bank failures on the financial system and lowering the financial burden on taxpayers in affected countries.

Currently, the EU relies on national Deposit Guarantee Schemes (DGS), the DGS covers what are known as Significant Banks under the SRM. At present, DGS’s cover deposits up to €100,000 per person per bank (European Central Bank, 2018). Local DGS are susceptible to local economic shocks and can place the burden of bank bailouts on the taxpayers of the affected country (European Commission, 2023). This situation particularly affects “Less Significant Institutions” (LSIs), which do not fall under the scope of the SRM or DGS. For reference the LSI of Europe hold assets totalling over €4.596 trillion (Single Resolution Board, 2023).

Additionally, European banks are relatively small on the global scale. For example, the combined stock market valuation of the largest five U.S. banks equals the combined value of the fifty largest EU banks (Samuels, S., 2024). The recent takeover attempt of Germanys Commerzbank by the Italian UniCredit exemplifies the complexities and challenges facing European banking due to the fragmented nature of deposit protection and regulatory frameworks. The controversy surrounding this takeover, including Berlin’s negative reaction, illustrates how cross-border banking consolidations can be politicized when they should be handled as technical matters (Storbeck, O., Chazan, G., Foy, H. and Sciorilli Borrelli, S., 2024). While the EU has a comprehensive competition policy and the ECB, supported by the SSM provides oversight, the lack of a unified European Deposit Insurance Scheme creates significant uncertainty.

Policy Critiques

The primary critique of the current DGS system is its vulnerability to local economic shocks, which can place a disproportionate burden on taxpayers in affected countries. Since each nation manages its own DGS independently, any severe economic downturn directly affects only that country’s resources. Consequently, if a national scheme becomes underfunded during a crisis, local taxpayers may be forced to cover the shortfall to protect depositors (European Commission 2023). Without a shared system, the current DGS structure leaves countries vulnerable to bearing the full brunt of financial crises, increasing the likelihood of strain on individual nations.

National DGS create an uneven playing field for banks within the Eurozone, limiting the potential for cross-border banking mergers and acquisitions due to the fear of liability falling on taxpayers of one nation. In the case of a bank failure, there is no Eurozone-wide deposit guarantee scheme; therefore, a bank like the Italian UniCredit could fail as a result of its attempt to break into the German market but would still be solely the responsibility of the Italian government and taxpayers (Samuels, S., 2024). This structure not only weakens the Banking Union’s resilience to future crises but also hinders the growth of European banks.

Policy Recommendations

To strengthen deposit protection across the Eurozone, a unified approach is recommended to address the disparities in national DGS. Establishing the proposed European Deposit Insurance Scheme (EDIS), would standardize protection levels, ensuring that depositors in all member states enjoy equal security, regardless of local economic conditions. As the European Commission (2017) states, “A European Deposit Insurance Scheme would increase the resilience of the Banking Union against future financial crises by providing strong and uniform insurance coverage for all depositors, independently of their geographical location within the Banking Union.” This approach would also diversify the risks associated with bank failures across the entire Eurozone, reducing the financial burden on individual countries and creating a more resilient banking system for the entire region.

As highlighted above cross-border banking acquisitions are an area of political and technical contention. The implementation of EDIS will provide a landscape in which competition can blossom as the risk of bank failure will be captured by a Euro-wide fund, thus removing the risk from the taxpayers of the host nation (European Commission 2015).

The current limitations of national Deposit Guarantee Schemes (DGS) leave gaps in the security of the European economy. Recognizing this, the European Central Bank has emphasized that the European Deposit Insurance Scheme (EDIS) and the Crisis Management Framework must advance in tandem (ECB, 2023). In its 2023 proposal, the European Commission aims to address these gaps by extending depositor protection to cover additional public entities as well as funds managed by investment companies, payment institutions, and e-money institutions. Furthermore, it proposes to standardize protection for temporary high balances exceeding €100,000 in specific situations, such as inheritances or insurance payouts (European Commission, 2023). Implementing EDIS is the essential first step in setting off a chain reaction of reforms that will drive a more resilient, competitive, and integrated banking landscape across Europe.

Conclusion

Implementing EDIS would provide a unified deposit protection framework across the Banking Union, increasing the sector’s resilience and ensuring equal depositor protection for all EU citizens. By finalizing the Banking Union with the EDIS, the EU would foster a safer banking environment, enhance cross-border competitiveness, and reduce political influence over banking consolidation decisions. EDIS would allow the European banking sector to move toward a more integrated, stable, and competitive future, providing consumers with more secure and diverse banking options across Europe.

Bibliography

Council of the European Union, 2023. Banking Union: What are the pillars of the banking union? [online] Available at: https://www.consilium.europa.eu/en/policies/banking-union/#definition [Accessed 5 November 2024].

European Commission, 2015. A stronger Banking Union: New measures to reinforce deposit protection and further reduce banking risks. [online] Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_15_6152 [Accessed 20 October 2024]

European Central Bank, 2018. What is a deposit guarantee scheme?: How does Deposit insurance work [online] 11 April. Available at: [What is a deposit guarantee scheme?] [25/10/2024].

European Commission, 2023. Banking Union: Commission proposes reform of bank crisis management and deposit insurance framework. [press release] 18 April 2023. Available at: [Commission proposes reform of bank crisis management] [27/10/2024].

Single Resolution Board, 2023. Small and medium-sized banks: resolution planning and crisis management report for less significant institutions in 2022 and 2023, p. 7, Table 2. Publications Office of the European Union. Available at: https://data.europa.eu/doi/10.2877/275060 [Accessed 25/10/2024].

Samuels, S., 2024. The trouble with UniCredit’s interest in Commerzbank. Financial Times, 29 September. Available at: https://www.ft.com/content/21601c54-d2d3-46c3-a613-316f6a59277a [Accessed 25/10/2024].

Storbeck, O., Chazan, G., Foy, H. and Sciorilli Borrelli, S., 2024. EU policymakers lash out at Berlin’s Commerzbank ‘hypocrisy’. Financial Times, 1 October. Available at: https://www.ft.com/content/f5602e1b-ff33-483b-b1fd-d88478e32a55 [Accessed 27/10/2024].

European Commission, 2023. Banking Union: Commission proposes reform of bank crisis management and deposit insurance framework. Better protection for depositors. Press release, 18 April. Brussels. Available at: https://ec.europa.eu/commission/presscorner/detail/en/ip_23_2250 [Accessed 24/10/2024].

European Commission, 2017. Communication to the European Parliament, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions on completing the Banking Union, (2017) 592 final. Brussels, 11 October. Available at: https://ec.europa.eu/finance/docs/law/171011-communication-banking-union_en.pdf [Accessed 28/10/2024].

European Commission, 2015. A European Deposit Insurance Scheme (EDIS)? – Frequently Asked Questions Why do we need EDIS now?. Strasbourg, 24 November. Available at: https://ec.europa.eu/commission/presscorner/api/files/document/print/en/memo_15_6153/MEMO_15_6153_EN.pdf [Accessed 24/10/2024].

European Central Bank, 2021. ECB contribution to the European Commission’s targeted consultation on the review of the crisis management and deposit insurance framework: General remarks. Available at: https://www.ecb.europa.eu/pub/pdf/other/ecb.consultation_on_crisis_management_deposit_insurance_202105~98c4301b09.en.pdf [Accessed 24/10/2024].