The fact remains: The road to a European deposit insurance scheme is a long and hard one

The debate about a joint European deposit insurance scheme is picking up steam again. In February, ECB President Mario Draghi called for the establishment of the EDIS (European Deposit Insurance Scheme) not to be delayed any longer. Aptly, the ECB published a study in April, in which the authors conclude that the EDIS would be able to guarantee cover for deposit losses even in the event of a severe banking crisis. German Chancellor Angela Merkel recently voiced her opinion on the matter at her meeting with Emmanuel Macron, where she declared Germany’s willingness to cooperate on a common deposit insurance system. However, she does not expect the project to be realised in the immediate future but rather in the longer term.

In fact, there are still major challenges to be overcome on the way to a European deposit insurance scheme, including the reduction of excessive risks that lie dormant on the balance sheets of numerous banks. This is evident by the volume of bad loans in Europe, which the European Banking Authority put at more than EUR 813bn in total at the end of 2017. Although the share of non-performing loans (NPLs) relative to total receivables was reduced from 6.2 percent at the start of 2015 to 4.0 percent at the end of 2017, the ratio still remains far too high. The extreme differences in risk between the countries is even more serious. While less than two percent of loans are non-performing in Luxembourg, Finland, Estonia and Germany, the figures in Greece and Cyprus are 44.9 and 38.9 percent respectively. The Italian banks still hold 11.1 percent of bad loans on their books, despite having made progress in this respect.

Clearing away the NPL mountain remains the primary task, even though it is not just a case of reducing the total volume. Tolerable NPL ratios must also be achieved in each individual country. Experts see the ceiling at three percent. However, tackling the problem legacy loans is not enough to rule out systemic cross-subsidisation between the national banking systems. If the EDIS is to avoid becoming a transfer union, risk-sensitive, sustainable new lending must be ensured without lumping all the banks together or hampering the ability to finance the economy by the imposition of additional regulations. As the supervisory authority, the ECB is required to intervene at individual bank level as soon as NPLs start to pile up at any one particular bank.

Public confidence is perhaps the greatest challenge to be faced on the way to a joint European deposit insurance scheme. The best system is of no use in the absence of confidence and if customers panic when a bank gets into difficulty. The transition from independent, national guarantee systems to a common European entity would then erode the stability of the financial markets. Given the huge mountain of bad loans and the massive imbalances of risk between the countries, demands to start entering the EDIS now will not help to build up confidence.


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