Authors: Mr John Sammut - Head, Internal Audit
Dr Jessica Friggieri - Lawyer, Financial Crime Compliance
The global financial crises of the past two decades have not only challenged financial services’ regulatory and operative framework, but also highlighted the importance of protecting the consumer.
In this regard, Depositor Guarantee Schemes (DGSs) have the specific task of protecting less financially-aware small depositors from losses they could incur when a bank fails. DGSs provide a mechanism by which depositors have quick and immediate access to their funds, even in the event that their bank fails.
The mechanism relies on the close bonds between banks in today’s financial systems. By being part of this financial system safety net, a DGS aims to maintain depositors’ financial stability in stressful conditions, while preventing them from engaging in a bank run and safeguarding the public confidence in the banking system.
DGSs have failed in periods of financial crisis
Although DGSs and their coverage have increased, the way governments and central banks have responded to periods of financial crisis – through bail-outs of failing banks – indicates that DGSs have ultimately failed in their objective.
While EU legislation ensures that all deposits up to €100,000 are protected through national deposit guarantee schemes in cases of bank failure, such scheme can be vulnerable to large local shocks. Within this context, the European Deposit Insurance Scheme (EDIS) was developed.
EDIS aims for stronger, more uniform insurance cover for retail depositors
The EDIS – which will be rolled out in three stages and should be fully implemented by 2024 – was developed to provide a stronger, more uniform degree of insurance cover for all retail depositors in the EU’s banking union. The Scheme also aims to ensure that the level of depositor confidence in a bank is independent of the bank’s location.
The first stage of the implementation process – which started in 2017 and should last till 2020 – is the reinsurance stage, during which deposit guarantee funds will be only able to access European funds once their own funds have been used up.
During the second, co-insurance stage, due to start in 2020 and expected to finish by 2024, national funds will not be obliged to first exhaust their own resources before accessing European funds. The European system will take on part of the costs from the moment the money has to be given back to depositors, starting with a 20% contribution and rising gradually.
By the third full-insurance stage, which will commence as from 2024, the EU’s participation rate in the EDIS is planned to reach 100%.
EDIS’ pros and cons
The EDIS brings with it advantages such as improved credibility, simplified pay-outs and failure resolution, and a reduction in moral hazard. At the same time, its success depends on the resolution of significant challenges brought about by the sheer complexity of the system and political issues in member states.
When it comes to the political dimension, the European Parliament and a majority of member states must give their approval before the EDIS comes into effect. Currently the discussions at Working Party level are still taking place.
