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Proposal for a European Deposit Insurance Scheme

Proposal for a European Deposit Insurance Scheme

In an effort to complete and strengthen the banking union in the eurozone the European Commission has proposed a European Deposit Insurance Scheme (EDIS) for the whole of the eurozone.


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In an effort to complete and strengthen the banking union in the eurozone the European Commission has proposed a European Deposit Insurance Scheme (EDIS) for the whole of the eurozone. This is the third and last pillar of the banking union for the European Commission and the European Central Bank (ECB), after the creation of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM).

Currently, there are national deposits insurance schemes in each member state of the eurozone, which are funded by contributions of the financial institutions. The question is whether these schemes have satisfactory funds in order to cover insured deposits. The recent proposal of the EU for the creation of the EDIS aims to deal with this issue.

 The EDIS will be based on the current deposit scheme and will be fully implemented in 2024, in three phases. In the first phase, which will be completed in 2020, the EDIS will act as the reinsurer of national systems, when these have used all their own resources. A basic requirement is the full compliance with the European directives, while there will be a maximum amount that can be provided by the EDIS.

In 2020, according to the EU scheme, the EDIS will change to a co-insurance mechanism, that is in case there will be a need for compensation of depositors, the EDIS will have the possibility to contribute part of the cost, without the exhaustion of all the resources of national schemes being a prerequisite (in 2020 the EDIS will have the capacity to cover 20% of the cost and this will increase gradually until 2024). From 2024 onwards, according to the scheme, the EDIS will cover 100% of the risk.

The EDIS will be funded by contributions of financial institutions, which can be removed from the contribution made to the national systems. Moreover, these contributions will be made based on risk, meaning that high risk financial institutions will contribute more.

The European Commission, in an effort to address Germany’s reactions in regards with this attempt, has announced that it will soon start imposing sanctions to member states which have not implemented the new regulations for the rescue of financial institutions. It is noted that the SSM and the SRM have already been institutionalized.

The SSM consists of the ECB and the national supervisory authorities and as of 2014 it has all the systemic financial institutions of the eurozone under its supervision. In this way there is a single supervisory framework that ensures the financial stability in the eurozone, through a risk prevention mechanism.

On the other hand, the purpose of the SRM is managing the resolution of problematic financial institutions, limiting the impact of such resolutions on the taxpayers and the national economies. In the last years the governments of the eurozone have proceeded to the nationalization of financial institutions burdening budgets and public debt.

The mechanism consists of two tools. The Single Resolution Council (Resolution Authority), which decides which financial institutions will be placed under a resolution regime and the way of implementing the resolution scheme, especially in cases of cross-border and big banks of the eurozone. The second tool is the Single Resolution Fund (SRF) which is established at a supranational level.

The SRF will be used only after the use of own resources for the rescue of the financial institutions under resolution. The funding will come from contributions of financial institutions and the fund is expected to begin its operation in eight years with a budget of 55 billion euros.

Cyprus is preparing to implement the European directive for the resolution of financial institutions of 2016 known as BRRD (Bank Recovery and Resolution Directive), which is part of the mechanism described above. A big part of the directive has already been adopted in Cyprus following the events of 2013 (maybe Cyprus was the first test for the directive).

The resolution process provides for the support of the financial institution by its shareholders, bondholders and the uninsured depositors, limiting the losses to the taxpayers. Based on the directive deposits up to €100.000 are protected.

KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ("KPMG International") a Swiss entity. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International Cooperative ("KPMG International") or KPMG member firms.

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