A Functioning European Deposit Insurance Scheme

Transcription

1 A Functioning European Deposit Insurance Scheme This draft version: 25 March 2018 Dirk Schoenmaker Bruegel Rotterdam School of Management, Erasmus University 1. Introduction A key function of deposit insurance is to provide a credible safety net for depositors which is beyond doubt, also in times of crisis Deposit insurance also raises moral hazard concerns; it is important to address these However, current proposals with national compartments to address moral hazard may make EDIS less effective Key is to keep the Banking Union rationale; the moral hazard can be addressed through a country component in the risk-based premium 2. Basics of deposit insurance Diamond and Dybvig (1983): deposit insurance is a mechanism to prevent bank runs in a fractional reserve system For depositors: it only works if it is beyond doubt for depositors (credibility) For banks: it is important that the impact on the remaining banks does not weaken the banking sector, as banks fund the scheme (both ex ante and ex post) For governments: the adverse selection and moral hazard aspects of deposit insurance should be addressed to minimise the exposure of the government as fiscal backstop 3. National compartments are destabilising Smaller funds are more vulnerable (history of state deposit insurance funds in the US; and more recently in Europe); large fund with a credible fiscal backstop stabilises banking system (Schoenmaker, 2018) The US history of deposit insurance is revealing. Before the introduction of the FDIC as part of the New Deal legislation in the 1930s by Franklin Roosevelt, many of the state-level DGS went bankrupt because of a lack of geographic diversification and size (Golembe, 1960). The idea of national compartments is to limit cross-border solidarity, because of lack of political support for a full EDIS (Gros, 2015; Schnabel and Véron, 2018) It means that the first part of the loss is borne at the national level, including partial clawback (Gros, 2015) or ex-post fees (Schnabel and Véron, 2018) 1

2 Distinction between idiosyncratic shocks at country level and systemic shocks at European level, but often no clear distinction (and bureaucratic fights about difference and prolonged crisis management) -> negative crisis dynamics (complicating crisis management) As banks often fail in times of recession, payouts typically happen when the surviving banks are also not in a very strong shape. The surviving banks have to refill the national compartment through future contributions (regular contributions and expost contributions). This could destabilise the national banking system, also in comparison with the other banks in the Eurozone. Example failure of SNS bank in the Netherlands. As it was clear how much the other banks had to contribute to deposit insurance fund (because of lingering uncertainty about the value of the real estate portfolio of SNS), the government stepped in to prevent weakening of other Dutch banks So, a national compartment may be self-defeating and reduce the stability of the national banking system. A second round effect may be that the credit function of banks is hampered (credit crunch), with negative impact on the economy -> Figure 1 shows the vicious cycle between national banking sector and domestic economy (Véron, 2017) With national compartments (Gros, 2015; Schnabel and Véron, 2018), there is a remaining need for national banking supervision (countries or banks in these countries will ask for it) You keep local liquidity and capital requirements in Banking Union -> no free crossborder banking flows + keep branch/sub gaming between banks and supervisors Figure 1. Bank sovereign linkages Sovereign exposures Sovereign Domestic banks Direct Guarantees (implicit + explicit), including deposit insurance Linkages Domestic Economy Indirect Linkages Source: Véron (2017) 2

3 4. Addressing moral hazard Moral hazard concerns o EC: concentration limits on sovereign bond holdings (Véron, 2017) o ECB: reducing NPLs (adverse selection) + ongoing supervision (moral hazard) o SRDIB: country risk component in premium (moral hazard) So, risk-based premium has bank specific risk component and country specific risk component (Schnabel and Véron, 2018) 5. EDIS integrated in Banking Union At European level (see Figure 2); ESM -> EMF (Sapir and Schoenmaker, 2017) EDIS integrated with SRB and SRF -> applying least cost principle (Gros and Schoenmaker, 2014) Transition period After transition period: fully functioning Banking Union with funded Single Resolution and Deposit Insurance Fund for resolution and deposit insurance purposes. We propose 2% target fund ratio for the joint fund, similar to the FDIC. The current target fund ratios are 1% for SRF and 1.5% for DIF (see Table 1). Figure 2. European institutions for financial supervision and stability in a Banking Union. EC/EBA ECB ECB SRDIB EMF Note: The framework illustrates the five stages from rulemaking to the fiscal backstop. The bottom line shows the agency for each function. Source: Schoenmaker (2013). After transition, national liquidity and capital requirements can be lifted Country risk component gives incentive to phase out large differences LSIs: supervision and deposit insurance at national level for the time being; but covered by SRM (all Eurozone banks) and SSM (ECB end-responsible); so, incorporate 3

4 as small funds are instable (see section 3) (see Schnabel and Véron (2018) for similar view) Table 1. Target size of Resolution and Deposit Insurance Fund (end-2017). SRF DIF Total SRDIF Target fund ratio (as % of covered deposits) 1% 1.5% 2.5% 2% Target size (in billions) Available funds (in billions) * Available as % of target size 32% 25% 28% 34% Note: Covered deposits of the Eurozone banks amount 5,456.6 billion at end The figures are for end-2017, except * available funds at DIF are for end Source: Author calculations based on EBA (2017) and SRB (2017). 6. Conclusions Yes, we need to address moral hazard concern -> country specific component in riskbased premium But no national compartments, as these can be destabilising We have to keep the Banking Union rationale References Diamond, D. and P. Dybvig (1983), Bank Runs, Deposit Insurance, and Liquidity, Journal of Political Economy, 91(3), European Banking Authority (2017), Deposit Guarantee Schemes data figures, London. Golembe, C. (1960), The Deposit Insurance Legislation of 1933, Political Science Quarterly, 76, Gros, D. (2015), Completing the Banking Union: Deposit Insurance, Policy Brief No. 335, CEPS, Brussels. Gros, D. and D. Schoenmaker (2014), European Deposit Insurance and Resolution in the Banking Union, Journal of Common Market Studies, 52(3), Sapir, A. and D. Schoenmaker (2017), The time is right for a European Monetary Fund, Policy Brief 2017/04, Bruegel. Schnabel, I. and N. Véron (2018), Breaking the Stalemate on European Deposit Insurance, Bruegel Blog Post, 5 March, Brussels. Schoenmaker, D. (2013), Governance of International Banking: The Financial Trilemma, Oxford University Press, New York. Schoenmaker, D. (2018), Resolution of International Banks: Can Smaller Countries Cope?, International Finance, 21(1), forthcoming. 4

5 Single Resolution Board (2017), Statistical Overview of the funds collected: SRF Contributions 2017, Brussels. Véron, N. (2017), Sovereign Concentration Charges: A New Regime for Banks Sovereign Exposures, Study for the European Parliament, Brussels. 5