On November 24, the European Commission put forward a proposal for a euro-area wide insurance scheme for bank deposits. In parallel, it set out additional measures to further reduce the remaining risks in the banking system. With the moves, the Commission aims to reinforce financial stability, reduce the link between banks and public finances and ensure that taxpayers are not first in line to pay for failing banks.  

Risk sharing

EU legislation already ensures that all deposits up to € 100,000 are protected in the case of a bank failure. However, at the moment this is done through countries' national deposit guarantee schemes (DGS), which are not backed by a common European scheme and may be vulnerable to large local shocks. The European Deposit Insurance Scheme (EDIS), by centralising deposit insurance, would provide a stronger insurance cover for retail depositors.

The recent crisis ''revealed the weaknesses in the overall architecture of the single currency,'' said Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and the Capital Markets Union. ''Step by step, we need to make sure that risk reduction goes hand in hand with risk sharing.''

The measures are one of a number of steps set out in the Five Presidents' Report, which is co-authored by President Jean-Claude Juncker and the heads of four other EU institutions and outlines ways to strengthen the EU's economic and monetary union.

EDIS will provide a third key pillar of the EU's banking union, which has already pooled responsibility for bank supervision (the Single Supervisory Mechanism, which acts as a 'watchdog' over banks) and bank resolution (the Single Resolution Mechanism, which steps in when banks are at risk of failing).

Step by step

The scheme will be introduced in three stages over a number of years. First will be a re-insurance of national deposit guarantee schemes. After three years, bank deposits will be co-insured by national deposit guarantee schemes and EDIS, with the contribution of EDIS increasing progressively over time. In the final stage, planned for 2024, all bank deposits in the euro area will be insured by EDIS.

The scheme will be 'cost-neutral' for the banking sector – in other words, the contributions banks make to EDIS can be deducted from their national contributions to deposit guarantee schemes. In addition, it will be risk-weighted, so riskier banks will pay higher contributions than safer banks. The scheme will also include a series of strict safeguards: for example, it will only insure those national deposit guarantee schemes that fully comply with EU rules.

Read more on the European Deposit Insurance Scheme