A stronger Banking Union: New measures to reinforce deposit protection and further reduce banking risks

Today, the Commission has proposed a euro-area wide insurance scheme for bank deposits and has set out further measures to reduce remaining risks in the banking sector in parallel.

The recent crisis has shown that large economic and financial shocks can weaken confidence in the banking system. The Banking Union was established to underpin confidence in participating banks: aEuropean Deposit Insurance Scheme (EDIS) will strengthen the Banking Union, buttress bank depositor protection, reinforce financial stability and further reduce the link between banks and their sovereigns.

Today’s measures are one of a number of steps set out in the Five Presidents’ Report to strengthen the EU’s economic and monetary union. The Commission’s legislative proposal would guarantee citizens’ deposits at the euro area level. The proposal is accompanied by a Communication, which sets out other measures to further reduce remaining risks in the banking system in parallel to the work on the EDIS-proposal.

Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue, said:“Completing the Banking Union is essential for a resilient and prosperous Economic and Monetary Union. The Commission’s proposal for a European Deposit Insurance Scheme builds on national deposit insurance schemes and would be accessible only on the condition that commonly agreed rules have been fully implemented. In parallel we need to take further measures to reduce risks in the banking system. We must weaken the link between banks and sovereigns, and put into practice the agreed rules whereby taxpayers should not be first in line to pay for failing banks.”

Commissioner Lord Hill, responsible for Financial Stability, Financial Services and the Capital Markets Union, said: “The crisis revealed the weaknesses in the overall architecture of the single currency. Since then, we have put in place a single supervisor and a single resolution authority. Now we need to take steps towards a single deposit guarantee scheme. As we do so, step by step, we need to make sure that risk reduction goes hand in hand with risk sharing. That is what we are determined to deliver.”

The scheme would develop over time and in three stages. It would consist of a re-insurance of national Deposit Guarantee Schemes (DGS), moving after three years to a co-insurance scheme, in which the contribution of EDIS will progressively increase over time. As a final stage, a full European Deposit Insurance Scheme is envisaged in 2024. The scheme includes a series of strong safeguards against ‘moral hazard’ and inappropriate use, in order to give incentives to national schemes to manage their potential risks in a prudent way. In particular, a national scheme will only be able to access EDIS if it fully complies with relevant Union law.

Key points

The European Deposit Insurance Scheme will be:

–       built on the existing system, composed of national deposit guarantee schemes set up in line with European rules; individual depositors will continue to enjoy the same level of protection (€100 000);

–         introduced gradually, step by step;

–         overall cost-neutral for the banking sector: the contributions banks make to EDIS can be deducted from their national contributions to deposit guarantee schemes;

–      risk-weighted; riskier banks will pay higher contributions than safer banks, and this will be strengthened as EDIS is introduced gradually; risk adjustments will apply from the outset

–        accompanied by strict safeguards: for example it will only insure those national DGS which comply and are being built up in line with EU rules;

–         accompanied by a Communication setting out measures to reduce risks, such as future proposals to ensure that banks’ exposures to individual sovereigns risk is sufficiently diversified; and

–          mandatory for euro area Member States whose banks are today covered by the Single Supervisory Mechanism; but open to other EU Member States who want to join the Banking Union.

Three evolving steps towards EDIS

Phase 1: Re-insurance

The Commission’s proposal starts with a re-insurance approach which would last for 3 years until 2020.

How it will work:

– In the re-insurance phase, a national DGS could access EDIS funds only when it had first exhausted all its own resources; and – as in all further phases – if it complied with the DGS Directive.

– EDIS funds would provide extra funds to a national scheme, but only up to a certain level.

There will be safeguards to ensure that national schemes can access the EDIS only when justified, and to address possible moral hazard. In particular, EDIS funds would only be available if the relevant rules in the DGS Directive have been fully applied by the Member State concerned. Any use of EDIS funds will be closely monitored. Any EDIS funds that are found to have been received inappropriately by a national scheme will have to be fully reimbursed.

This first re-insurance step would weaken the link between banks and their national sovereigns. But more is needed to provide full insurance for national schemes to fall back on and ensure that all retail deposits in the Banking Union enjoy an equal level of protection. This is why a second step is needed.

Phase 2: Co-insurance

After 3 years as a re-insurance scheme, in 2020 EDIS would become a progressively mutualised system (“co-insurance“), still subject to appropriate limits and safeguards against abuse.

The key difference in this phase is that a national scheme would not be required to exhaust its own funds before accessing EDIS funds. EDIS would be available to contribute a share of the costs from the moment that bank depositors need to be reimbursed. This introduces a higher degree of risk-sharing between national schemes through EDIS. The share contributed by EDIS will start at a relatively low level (20%) and will increase over a four year period.

Phase 3: Full insurance

By gradually increasing the share of risk that EDIS assumes to 100%, EDIS will fully insure national DGS as of 2024. This is the same year when the Single Resolution Fund and the requirements of the current DGS Directive will be fully phased in.

The European Deposit Insurance Fund

A European Deposit Insurance Fund would be created from the outset. It will be financed directly by bank contributions, adjusted for risk. Management of the European Deposit Insurance Fund would be entrusted to the existing Single Resolution Board.

Risk reduction measures

Alongside introducing EDIS and in parallel to the work on the legislative proposal, the Commission will pursue a full package of measures to reduce risks and ensure a level playing field in the Banking Union.

These include:

–        Reducing national options and discretions in the application of prudential rules so that the Single Supervisory Mechanism (SSM) can operate as effectively as possible.

–         Harmonising national DGS.

–         Legislating to implement the remaining elements of the regulatory framework pertinent to banks agreed at international level, in particular to limit bank leverage, to assure stable bank funding and to improve comparability of risk-weighted assets, and to enable implementation by 2019 of the Financial Stability Board’s recommendations on Total Loss Absorbing Capacity for banks, so that adequate resources are available for failing banks without resorting to taxpayers.

–      Enforcing existing rules so that the use of public funding to maintain a solvent and resilient banking sector is minimised.

–       Greater convergence in insolvency law as set out in the Capital Markets Union Action Plan.

–       Initiatives as regards the prudential treatment of banks’ exposure to sovereign risk, such as limiting banks’ exposures to a particular sovereign to ensure risk is diversified.

Alongside these actions, the Commission will work to ensure full transposition by Member States of existing legislation in this field, such as the 2014 Directives on Bank Recovery and Resolution (BRRD) and Deposit Guarantee Schemes. Where relevant, infringement proceedings have already been launched to this end.


In 2012, as part of a longer term vision for economic and fiscal integration,the Commission called for a Banking Union that would place the banking sector on a sounder footing and restore confidence in the euro. The Banking Union was to be implemented step by step by shifting supervision to the European level, establishing a single framework for bank crisis management and, a common system for deposit protection. While the first two steps have been achieved by the establishment of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), a common system for deposit protection has not yet been established.

The Five Presidents’ Report of 22 June 2015 and the Commission’s follow-up Communication of 21 October 2015 set out a clear plan for deepening Economic and Monetary Union (EMU), including steps to further limit risks to financial stability. Completing the Banking Union is an indispensable step towards a full and deep EMU. For the single currency, a unified and fully integrated financial system is important for effective monetary policy transmission, better absorption of economic shocks through adequate risk diversification across Member States, and general confidence in the euro area banking system.

In particular, the Five Presidents’ Report proposes to establish, in the longer term, a European Deposit Insurance Scheme (EDIS), as the third pillar of the Banking Union alongside bank supervision, which has been entrusted to the SSM, and bank resolution, which has been entrusted to the SRM.

While national DGSs are already in place and provide for the protection of EUR 100 000 per person/per account per bank, they are not backed by a common European scheme.