Friday, September 14, 2012

A European Deposit Insurance and Resolution Fund: An Update

A European Deposit Insurance and Resolution Fund: An Update. By Dirk Schoenmaker, Duisenberg School of Finance; VU University Amsterdam, and Daniel Gros, Centre for European Policy Studies, Brussels; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Duisenberg School of Finance Policy Paper Series No. 26
September 12, 2012


Cross-border banking is currently not stable in Europe. Cross-border banks need a European safety net. Moreover, a truly integrated European-level banking system may help to break the diabolical loop between the solvency of the domestic banking system and the fiscal standing of the national sovereign.

This policy paper first sketches the building blocks of a Banking Union. Importantly, a new European Deposit Insurance and Resolution Authority (EDIRA) should start simultaneously with the ECB assuming supervisory powers. A combination of European supervision and local resolution cannot work because it is not ‘incentive compatible’. Next, this paper proposes a transition period to gradually phase in the European deposit insurance coverage. Finally, we calculate that a European Deposit Insurance Fund would amount to about €30-50 billion for the 75 euro area banks that were subject to the EBA stress tests. This Fund could be created over a period of time through risk-based deposit insurance premiums levied on these banks. Once up and running, the Fund would then turn into a European Deposit Insurance and Resolution Fund to also deal with the resolution of one or more of these European banks.

Keywords: financial stability, banking, deposit insurance, resolution
JEL Classification: F36, F42, F51, G28