Proposals for reforming deposit guarantee schemes in Europe

Journal of Banking Regulation

Volumn 11, Issue 3, 2010, Pages 210-222

  Ayadi, Rym ^a   Lastra, Rosa M ^b  

^a Centre of European Policy Studies   (Italy)

^b QUEEN MARY UNIVERSITY OF LONDON   (United Kingdom)

Author keywords

banks and banking; deposit insurance; EU financial law and regulation; financial crisis

Indexed keywords

EID: 77956895740     PISSN: 17456452     EISSN: 17502071     Source Type: Journal    
DOI: 10.1057/jbr.2010.9     Document Type: Article

References (28)

1. Action announced on 30 September 2008 and passed in legislation by the Irish Parliament on 2 October 2008.
2. The [UK] Banking Bill was introduced into Parliament on October 2008 and received Royal Assent on 12 February 2009. The Bill is now an Act of Parliament, the Banking Act 2009, http://www.opsi.gov.uk/acts/acts2009/ukpga-20090 001-en-1.
3. This section of the article draws upon Chapter 4 of Lastra, R. (2006) Legal Foundations of International Monetary Stability. Oxford: Oxford University Press.
4. The use of this 'transportation analogy' is borrowed from Joseph Stiglitz, who wrote an article on 'Boats, planes and capital flows' published by the Financial Times, 25 March 1998. In that article, he eloquently stated: 'Although one cannot predict when it [a crisis] might happen, the chances of their [the boats] being broadsided by a wave are significant, no matter how well they are steered. Bad steering, though, increases the chances of disaster and a leaky boat makes it inevitable.
5. Friedman, M. (1959) The Control of Money. A Program for Monetary Stability. New York: Fordham University Press, p. 21.
6. Asli DemirgüçKunt and Enrica Detragiache conducted a study of banking crises around the world, covering the period 1980-1994 and concluded that 'the presence of an explicit deposit insurance scheme tends to increase the probability of systemic banking problems'.
7. See Asli Demirgüç-Kunt and Enrica Detragiache, 'The Determinants of Bank Crisis in Developing and Developed Countries' 45(1) IMF Staff Papers 104 (1998). In a more recent publication, Asli Demirgüç -Kunt and Edward Kane have come to a similar conclusion: '[c]ross-country empirical research on deposit insurance strongly supports the hypothesis that in institutionally weak environments, poorly designed deposit-insurance arrangements tend to increase the probability of future banking crises'.
8. See Demirgüç-Kunt, A. and Kane, E. (2001) Deposit Insurance around the Globe, Where Does it Work? Washington DC: World Bank. World Bank Paper No. 2679, p. 24.
9. For a study of these issues, see inter alia, Dale, R. (2000) Deposit insurance in theory and practice. Journal of Financial Regulation and Compliance 8(1): 36.
10. Garcia, G. (2001) Deposit Insurance: A Survey of Actual and Best Practices. Washington DC. IMF Occasional Paper No. 197.
11. See ESFRC Statement No.5 of 18 October 1999. The statements of the ESFRC are available at http://www.ceps .be; and http://www.aei.org.
12. See generally, Dale, R.S. (1993) Deposit insurance, policy clash over EC and US Reforms. In: F.C. Shadrack and L. Korobow (eds.) The Basic Elements of Bank Supervision. New York: Federal Reserve Bank of New York.
13. See also http://www.efdi.net/scarica.asp?id=65&Types= DOCUMENTS.
14. The work of the Basel Committee and the International Association of Deposit Insurers, in particular the Core principles for effective deposit insurance systems, published on 12 March 2009, is the most relevant example of international harmonization (although of a soft law nature) in this area. See http://www.bis.org/publ/bcbs 151.htm.
15. Available at http://ec.europa.eu/internal-market/bank/ docs/guarantee/comm9419-en.pdf.
16. The definition of deposits and scope of coverage, the coinsurance, the topping-up arrangements, the exchange of information requirements, the risk-based contributions to DGS, the transferability/refundability of DGS contributions, the consumer information and advertising y.
17. In the compromise package of the Council published on 24 November 2008 and which was agreed on the 2 December 2008, changes to the original Commission's proposal related to coverage levels were introduced. The timeline of increasing the coverage to 100 000 euros was extended by 2 years (from 31 December 2009 to 31 December 2011), subject to a report by the European Commission to evaluate the impact of such an increase and the necessity for this amount to become a harmonized coverage level in the Community. The new coverage level becomes a maximum, rather than a minimum as in the 1994 Directive.
18. The 3-day payout delay was deemed unrealistic by the European Parliament and the Council. The former proposed an extension of the payout delay to 10 days and the former to 20 days. The Council also expects from the European Commission an impact assessment on the delays of the payout procedures by 31 December 2010.
19. In a CEPS report, Karel Lannoo (2008) supports the creation of a federal deposit protection fund in the EU rather than attempting to harmonize different national deposit protection schemes (in Lannoo K. (2008), 'Concrete steps towards more integrated financial oversight', CEPS Taskforce Report). In a more recent CEPS Taskforce report on bank crisis resolution.
20. Carmassi, J., Luchetti, E. and Micossi, S. (2010). Overcoming too-big-to-fail: A regulatory framework to limit moral hazard and free riding in the financial sector. CEPS Taskforce Report, March, defend an ex ante funded European deposit insurance fund in 'overcoming too big to fail'. Ex ante funding has been considered by the European Commission too, as well as other issues such as the links with supervision, and with resolution procedures.
21. See Proctor, C. (2008) mimeo.
22. See Lastra, R. (2008) Northern rock, UK bank insolvency and cross-border bank insolvency. Journal of Banking Regulation 9(3): 939-955.
23. When a bank sets up a branch in another EU Member State, where the coverage level is higher of the scope is broader than in its home country, then it has the right to join the host country DGS. This avoids any competitive distortions at a local market level.
24. In this article, we do not discuss the relative benefits for European banks and for their supervisors of setting branches or subsidiaries in terms of their cross-border establishments. A trend towards subsidiarisation needs to be carefully assessed, to make sure it does not imply a departure from the tenets of the single market in financial services.
25. The Ecofin Council, on 2 December 2009, approved the creation of the new three European Supervisory Authorities, which together with the European System Risk Board (for which broad political agreement was reached on
26. October 2009) form the new EU supervisory structure. See http://www.consilium.europa.eu/uedocs/cms-Data/ docs/pressdata/en/ecofin/111706. pdf.
27. See http://www.publications.parliament.uk/pa/ld200809/ ldselect/ldeucom/106/106i.pdf.
28. Recent proposals are sympathetic with a European deposit insurance system. Carmassi, J., Luchetti, E. and Micossi, S. (2010) envisage the establishment of a European deposit insurance system through the creation of a pre-funded riskbased European deposit insurance fund that serves to protect depositors of large European banks in case of crisis situation or failure; and the European deposit insurance corporation that will be entrusted with any power to recapitalize or bail out failing institutions and reorganization functions aimed at depositors protection. Another proposal from the European Parliament supports the establishment of a European financial protection fund that will replace the membership in the existing national DGSs for institutions participating in it. Financed by financial institutions, debt issuance and under exceptional circumstances subject to Member States guarantees, it will serve to ensure financial stability. This fund will be managed by a board appointed by the European Banking Authority for a period of 5 years. Deutsche Bank CEO Josef Ackermann advocated in Davos in January 2010, the establishment of a European Rescue and Resolution Fund largely financed by the banking industry.