FFI: EDIS would further increase joint liabilities

The Finnish financial sector believes a single Banking Union deposit guarantee scheme would be unnecessary and impossible to implement under current conditions. On November 24, the European Commission published a legislative proposal that would establish a single European Deposit Insurance Scheme (EDIS) by the year 2024.

​Chief economist Veli-Matti Mattila from the Federation of Finnish Financial Services (FFI) draws attention to the notable differences in euro area banking and deposit guarantee systems. ”There is a real risk that banks – and ultimately, their customers – would have to bear an unfair load of responsibility for the costs of the EDIS. Instead of building a single system, we should focus on the harmonisation of national schemes in accordance with the Deposit Guarantee Schemes Directive.”

FFI’s Managing Director Piia-Noora Kauppi considers the already active Single Supervisory Mechanism and the Single Resolution Mechanism, its sibling currently in preparation, to be vital for the stabilisation of the banking sector. ”The mechanisms increase trust and confidence in the system.”

”The Banking Union already includes a Single Resolution Fund, which will establish extensive joint liabilities between the banks of different countries. Finnish banks would be required to contribute an estimated one billion euros into the Fund. From the Finnish viewpoint, joint liabilities should definitely not be increased any further”, Kauppi says.

Kauppi insists that the European Deposit Insurance Scheme’s role in the new recovery and resolution framework must be carefully assessed. In this framework, the costs of banking crises would primarily be covered through investor bail-in.

The deposit guarantee schemes of individual euro area countries are extremely different in terms of how much funds they have collected from banks. Many euro area countries have collected none at all.

Mattila adds that individual euro area banks also have pronounced health differences. This is apparent in their capital adequacy ratios and volumes of non-performing exposures, for example. Non-performing exposures refer to banks’ loans and other claims that are more than 90 days in arrears. Finland has the smallest amount of such claims in the euro area.

”Single banking supervision is only taking its first steps. The aim is to harmonise supervision and thereby narrow down the health differences between banking systems, but the process is a slow one. It has already become evident that banks’ capital requirements are not as uniform as formerly thought. The Comprehensive Assessment carried out by the ECB also left thousands of smaller banks outside its scope”, Mattila says.

The Commission’s proposal sets three stages for the EDIS. It would first involve the re-insurance of national deposit guarantee schemes, moving after three years to a co-insurance scheme, in which the contribution of EDIS will progressively increase over time. As the final stage, a full European Deposit Insurance Scheme would be established.

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Financial and Prudential Regulation

Veli-Matti Mattila

Director, Chief Economist