Safe Savings

'We Act Better Together'

Buildings stand in the foreground of the Deutsche Bank AG headquarters in Frankfurt, Germany, on Thursday, Oct. 29, 2015. Deutsche Bank AG said it will shrink the workforce by about 26,000 people by 2018 as co-Chief Executive Officer John Cryan seeks to improve returns. Photographer: Jasper Juinen/Bloomberg
Deutsche Bank headquarters in Frankfurt.
  • Why it matters

    Why it matters

    The European deposit insurance scheme is the next step in shoring up the E.U.’s financial sector following the financial crisis.

  • Facts


    • The European Union has done much to prevent another financial crisis, but there is still more to be done, Mr. Hill writes.
    • This includes a proposal for a European deposit insurance scheme, or EDIS, set to be presented on Tuesday.
    • The proposal’s aim is to strengthen financial stability, protect taxpayers and increase trust in banks.
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One of the lessons of the financial crisis, it became clear, was that there were weaknesses in the overall architecture of the single currency.

Today, we are better prepared. That is thanks to the European Union’s response, which created the banking union, for example. We have tougher rules for banks, a single supervisory mechanism for banks within the euro area, and a single recovery and resolution framework so that failing banks won’t have to call on taxpayers for a bailout.

We also have stronger measures to ensure fiscal discipline and economic reform.  And we have reinforced national deposit insurance schemes to guarantee bank deposits.

These steps have made euro area banks more resilient and their depositors more confident. Taxpayers are now better protected. But we have not yet finished the job.

Current rules guarantee bank deposits up to €100,000, or $106,000: but these rules are nationally based. That means that the level of confidence in a bank might depend on where that bank is from – which doesn’t make sense within a single currency area.  It also means that the national deposit schemes (and hence banks) are all individually vulnerable to large local shocks.

But if we can overcome this, we can strengthen financial stability, break the link between banks and taxpayer support, and deliver even greater trust in the safety of retail bank deposits.

That is why on Tuesday, we will come forward with a proposal for a European deposit insurance scheme, or EDIS. We will do this step by step. The first step will be “re-insurance”-based, which will sit alongside the national deposit guarantee schemes. There will be safeguards against moral hazard and potential abuse: The re-insurance scheme will only kick in when national deposit insurance funds have been exhausted. That means national systems will remain liable in the first place.

And no one will be able to get money out of EDIS unless they have paid their contributions. It will be done in a “cost neutral” way, so that the overall costs for the banking sector will not rise.

Greater mutualization of risk will only happen gradually over time and needs to be accompanied by measures to reduce risks so that there is less risk to share in the first place. Much has been done toward risk reduction since the crisis. But we have to go further still. That’s why this week we will set out a number of ideas to address the topic of banks’ risks through national sovereign debt.

This is not about endangering strong banks to prop up weak ones: it is about recognizing that we act better together. The stronger the overall system, the better a bank can weather stress – wherever it is located.  No national scheme could be strong enough to resist a major local shock. But a single euro area scheme will be stronger than the sum of its parts.

Experience from the United States shows that a strong and effective guarantee scheme can aid economic recovery. We want Europeans to know their bank savings are safe; that we have a stable financial sector that does not rely on bailouts; a banking sector that is stronger and more integrated across the euro area; and, most of all, an economy that is resilient, growing, and creating jobs. Our proposals this week will help us achieve these objectives.

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