Deutsche Bank Research

Suggestions have been made in recent days to establish a pan-European (or at least EMU-wide) deposit guarantee scheme as a silver bullet to stabilise banking systems.

It won’t happen – at least not any time soon. In principle, a truly integrated EU banking market, which is desirable for both efficiency and stability reasons, would indeed need to be completed by a commensurate institutional framework, incl. pan-European supervision, deposit guarantee scheme and resolution fund. But all of this is a comprehensive package. As deposit guarantee schemes are inextricably linked to the exercise of sovereign power in the case of bank failure, a pan-European deposit guarantee is logically linked to the establishment of pan-European supervision.

There is little indication whatsoever that E(M)U members would now be willing to accept this, having rejected it for decades. More importantly, to the extent that guarantee schemes are government funded (or have a government back-up line), pooling deposit insurance systems on a pan-European basis would entail a de facto fiscal transfer between member states – much like Eurobonds – and would face the same obstacles. Hence, when EU officials now speak of «embryonic FDIC-like structures», what they mean simply is that the forthcoming Bank Resolution Directive (to be published on June 6th) will create a European legal basis for a speedy resolution of failed banks. It will not, however, entail the creation of pan-European institutional arrangements for this or a pan-European deposit guarantee scheme. Instead, there will merely be a lot on coordination of respective national arrangements and institutions by EBA.

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Published with kind permission of Deutsche Bank Research.