The contribution that banks pay into depositor compensation schemes will in the future reflect its risk strategy, a decision lobbied for by more conservative banks.
The actual formula has not yet been worked out, but the decision has been taken in principle, as one of the many changes that are being made to ensure stability in financial services.
In 2011, a temporary system was put in place which guaranteed up to €100,000 of a person’s deposits in a bank if this were to fail. This will now become permanent, and in some specific cases, deposits beyond €100,000 will also be protected.
Until now, all banks paid a sum depending on their deposits, but in future those involved in riskier activities will contribute more.
Within 10 years, each member state’s scheme must have accumulated enough funds to cover 0.8 per cent of all deposits.
Another important change being made is that the refund to depositors will gradually be reduced from the current 20 working days to just seven by 2024, following the insistence of the European Parliament.
The decision to link the fund to the risk strategy was welcomed by Bank of Valletta chairman John Cassar White, who had raised the point during a recent interview.
“It is good news that the European Parliament is insisting on the Deposit Guarantee Scheme being underpinned by a risk assessment of participants. But there is still a long way to go. The European Banking Authority is now expected to issue guidelines that hopefully will be accepted by the European Council. These guidelines are expected to respect the EP’s wish to have the system risk sensitive,” he said.
The changes being made in the EU will culminate with the creation of a European Banking Union, and covers the setting up of a single supervisory authority and a single resolution mechanism.
€55bn fund has hit a brick wall
However, there is a stalemate between the European Parliament and the Council over the latter mechanism, which is meant to determine who would pay should a bank collapse, as has happened in various member states since the 2008 crisis.
It looks very unlikely that the two sides will reach an agreement before the March deadline, according to a European Parliament spokesman.
The intention was to break the link between a failing bank and the member state itself, which in the past has resulted in the country’s economy being contaminated by the failure of its banks – which then spread to other member states.
“How did a country like Cyprus create such havoc when its whole economy is half the size of Brussels?” a professor of economics explained, speaking off the record during a briefing for journalists in Brussels. “Had banks of that size collapsed in the US it would not even have made it to the front pages! The American Federal Deposit Insurance Corporation would have just stepped in and cleaned up the mess over the weekend. This is why we need a European version of the FDIC – why we need a banking union.”
The starting point for discussions was that the money for re-structuring a failing bank should not come from taxpayers but from the bank’s owners and creditors – meaning shareholders could find their investment disappear.
“It means that investors should start to think about which banks are sustainable and not aggressive risk takers,” one MEP warned.
“If they want double digit returns, they would be better off going to a casino,” another MEP commented.
But the plan to set up a €55 billion resolution fund has hit a brick wall. While the European Parliament wants to have one fund with contributions aggregated from all the member states which would be accessible to all, the Council – primarily under pressure from Germany, according to sources – wants to have national ‘compartments’ within the fund.
“We need a pan-European response to a pan-European problem,” an international expert said during a recent off-the-record briefing, a point also being made by European Central Bank Governor Mario Draghi.
Impasse over fund
“If a bank fails and only money from other banks in that member state would be used to help it, then it could cause systemic risk. If you have to go back to the government when there is a problem, then it defeats the whole purpose of breaking the link between the banks and the sovereign,” one MEP said.
Another aspect causing concern is the fact that the Council wants the resolution fund to be built up over a 10-year period. But the EP and the European Cenral Bank want to bring this down to five years, although even then, it is still not clear what would happen should there be a crisis before then.
Since the banking union will be aimed at members of the eurozone (and some other countries), it is also not clear what would happen should there be a crisis in a country outside the eurozone, such as the UK.
There is also controversy over the legal basis for creating a mutualised fund, with some member states insisting that the fund should be inter-governmental and not an EU one.