Deposit Insurance (cepPolicyBrief)


Bank failures, imbalances, financial crises: With improvements to the so-called Deposit Guarantee Directive, the EU Commission wants to better protect savers and strengthen confidence in the financial system. The Centre for European Policy (cep) attests that the planned reform has both good and negative approaches.


"The inclusion of the public sector in deposit insurance is double-edged. On the one hand, it can remove administrative hurdles and reduce legal uncertainties. On the other hand, it may lead to a failure to adequately assess the risk profiles of the various banks," says Berlin-based cep financial expert Anastasia Kotovskaia. Together with the Freiburg-based cep financial expert Philipp Eckhardt, she has examined the Commission's efforts to eliminate existing deficiencies.

According to the cep analysts, the stipulation of a minimum amount of 500,000 euros and a maximum period of six months for temporarily high balances contributes to standardisation and reduces the administrative burden. However, differences in income and wealth in the member states could justify different levels of depositor protection.

In addition, the cep scientists see the danger of moral hazard risks. "If banks can count on being supported by preventive measures in a banking crisis, this may tempt them to choose riskier business models," Eckhardt warns. Distortions of competition cannot be ruled out, and there is a danger that banks are supported whose exit from the market would be compelling from an economic point of view. Therefore, such measures should not be explicitly promoted. In addition, harmonised least-cost tests, which are prescribed to examine the cost-effectiveness of the various intervention measures of the deposit guarantee schemes, can prevent the funds of the deposit guarantee schemes from being overused. However, the costs can regularly only be estimated. Decisions based on these tests are therefore not free of errors and biases.

Political efforts to ensure that money launderers do not enjoy depositor protection are, in Anastasia Kotovskaia's view, justified "to maintain honest depositors' confidence in deposit insurance". However, legal obstacles still need to be removed. These include, in particular, the fact that deposit guarantee schemes and supervisory authorities are regularly not informed about the initiation of money laundering investigations.