Moment of truth in the EU – will risk sharing in the Banking Union increase?

Graphics: Olga Komulainen
  • Review of the Banking Union’s bank crisis management and deposit insurance framework (CMDI) is presently under discussion in the EU.
  • Establishing a European deposit insurance scheme (EDIS) should not be hurried. The issues of unhealthy banks must first be solved.
  • If an EDIS is implemented, the scheme should be lending-based. Potential losses must be covered at national level.
  • The Banking Union was one of the topics of the Eurogroup’s meeting on 17 June and will be discussed in the European Council’s meeting on 24–25 June.
  • The Commission will present legislative proposals of the CMDI by the end of the year.

The Finnish financial sector is committed to the main objective of the banking union: improving the stability of the EU banking system. The single rulebook and harmonised risk assessment are ideas worth supporting, and the same goes for single banking supervision and the crisis resolution mechanism.

“The problems of unhealthy banks must first be solved. Liquidation and asset transfers must be financed first and foremost through investor bail-in”, comments FFI’s Head of Banking Regulation Olli Salmi.

If a common deposit insurance scheme is implemented, it must be based on lending rather than risk sharing. Potential losses must be covered at national level.

An unfair deposit insurance scheme would also cover investor losses. If a bank then runs into problems, the scheme’s assets would be used for purposes that may benefit the bank’s owners and other investors instead of its actual purpose, which is to protect the bank’s depositors. These funds may be unrecoverable. Drawing on the scheme’s assets will drain them and make it necessary to raise deposit insurance contributions. This will increase costs for other member banks and may negatively impact their lending, for example. Thus, costs resulting from losses would be pushed to external parties instead of banks’ investors.

The Finnish Government stands with the financial sector on this subject. According to the Government Report on EU Policy in January, Finland’s basic premise in completing the Banking Union is based on a comprehensive and effective implementation of bail-in so that the costs for taxpayers could be minimised in the case of bank crises. Risk-sharing in the Banking Union should, however, be based on a fair insurance-type mechanism where the bank contributions for a common deposit insurance reflect the underlying risks. Risks must be reduced before advancing with the Banking Union.

In a fair scheme, each bank pays contributions to the fund for the eventuality that it becomes unable to pay back deposits. If the bank fails, its depositors will be compensated by the bank or, if the bank is insolvent, by the resolution fund for up to €100,000. The resolution fund will be compensated by the bank’s estate. The bank’s owners and other investors will bear the costs through bankruptcy. The risk that materialises is normal investment risk.

“Every member state’s own banking system and every individual bank must reach a healthy financial situation. Only then can we proceed to completing the Banking Union”, Salmi states.

The future of the Banking Union was discussed in Finance Finland’s EU Round Table webinar on 17 March. In addition to the financial sector’s own representatives, the speakers included Director-General of DG FISMA John Berrigan, Member of the European Parliament Eero Heinäluoma, and the Finnish Permanent Under-Secretary for International and Financial Markets Affairs Leena Mörttinen.

Watch a recording of the FFI webinar on the completion of the Banking Union

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Financial and Prudential Regulation

Olli Salmi

Head of Banking Regulation