Banking union

How to move toward European deposit insurance

Workers install boards to protect a branch of German Commerzbank next to the headquarters of the European Central Bank in Frankfurt
Sorry, we're closed. Source: Reuters

Europe is on the move: There are growing signs that serious reforms of the monetary union could be in the cards for 2018. But there is still one major sticking point: Germany is vehemently opposed to a common European deposit insurance scheme. This was actually intended to be the third pillar of the banking union. But unlike European banking supervision and a single resolution mechanism for bankrupt banks, it has not yet been implemented.

The basic idea of a common deposit insurance scheme is certainly correct. It is intended to give depositors throughout the euro area the certainty that they will get their money back even if their bank runs into difficulties. This is to prevent customers from withdrawing their money in a panic as soon as doubts arise about the solvency of their bank.

Deposit insurance schemes are currently financed at the national level by banks themselves, usually through risk-related premiums. This allows them to address smaller problems in the sector. But there are concerns that the accumulated funds would not be enough to cope with a major crisis.

Under the existing European rules, depositors are protected up to an amount of €100,000 per investor and bank. However, only 0.8 percent of those protected deposits are paid into the national guarantee funds. If those funds run out, the government can step in and guarantee the deposits – as it did in Germany in the fall of 2008. The actual security of deposits thus depends to a large extent on the solvency of the nation behind it, particularly in the event of a systemic crisis.

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