Not cleared from scrutiny
Proposal for a Regulation to establish a European Deposit Insurance Scheme
Article 114 TFEU; ordinary legislative procedure; QMV
(37332), 14649/15, COM(2015) 586
2.1In November 2015 the European Commission tabled a Regulation to create a European Deposit Insurance Scheme (EDIS) within the EU’s Banking Union, which currently consists only of the Eurozone countries. The EDIS, as originally proposed, would eventually mutualise all deposit liabilities across the Banking Union into a single deposit guarantee scheme. This, the Commission argues, would prevent a large local banking crisis from overwhelming the national deposit guarantee scheme (DGS) of a Member State. The scheme would be funded by direct contributions from banks.
2.2The Government does not consider that the proposal has any direct impact on the UK, given that it does not participate in the Banking Union and will therefore not be covered by the EDIS, should it be established.
2.3In January 2018 the then-Economic Secretary to the Treasury (Stephen Barclay) wrote to the Committee with an update on the negotiations on the proposed scheme. The Minister’s letter confirms that negotiations over the proposal remain protracted, and that there is no agreed position among the Member States on key elements of the draft legislation (the sharing of the cost of compensating deposit-holders in the event of a bank failure). A number of Eurozone countries, led by Germany, are of the view that a parallel package of measures to reduce the risks of a crisis in the EU’s banking sector need to be agreed before any mutualisation of the costs of such a crisis would be shared. To break this deadlock, the Commission suggested in October 2017 that the proposal could be modified to stop short of full mutualisation of national DGS.
2.4Although the political element of the proposal is effectively on ice, Eurozone countries have continued discussing the technical aspects of the proposal, including the methodology for calculating banks’ contribution to the EDIS. The current Bulgarian Presidency of the Council is expected to continue facilitating discussions on the EDIS at a technical level in the coming months, but no agreement is foreseen in the first half of 2018.
2.5We thank the Minister for the information on the state of play on the EDIS. Given that the UK will not be part of the mutualised deposit guarantee scheme irrespective of Brexit, and negotiations on the proposal have not progressed substantially, no immediate issues arise that would affect the UK’s interests.
2.6However, we retain the draft Regulation under scrutiny given its importance within the wider EU Banking Union, which may influence the future of EU financial services legislation and, by extension, have an impact on the substance and scope of a financial services agreement between the UK and the EU after Brexit. We also note the possibility that branches of UK banks within the Eurozone may have to make a financial contribution to the EDIS, if and when it is established.
Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 806/2014 in order to establish a European Deposit Insurance Scheme: (37332), 14649/15, COM(2015) 586.
2.7Following the financial crisis, the EU introduced a ‘Single Rulebook’ for the banking sector. This is EU legislation that applies to all credit institutions and across the EU. The primary legislative acts of the rulebook are the 4th Capital Requirements Package (CRD 4); the Deposit Guarantee Schemes Directive (DGSD); and the Bank Recovery and Resolution Directive (BRRD).
2.8In addition to efforts to reinforce the economic governance of the Eurozone to make its public finances sustainable, the European Commission also launched a drive towards the creation of a Banking Union. The purpose of the Banking Union is to apply the Single Rulebook in the most uniform way possible, with the aim of making the banking sector more secure and preventing any future needs for taxpayer-funded bail-outs. Participation in the Banking Union is mandatory for Eurozone countries and voluntary for other EU Member States. At present, no non-Eurozone country participates, although both Denmark and Sweden are considering joining.
2.9The Banking Union currently consists of two pillars:
2.10In November 2015 the Commission tabled a Regulation for a third pillar of the Banking Union: a European Deposit Insurance Scheme (EDIS). The EDIS, as originally proposed, would eventually mutualise all deposit liabilities across the Banking Union into a single deposit guarantee scheme. The scheme is to be introduced by amendment of the Single Resolution Mechanism Regulation.
2.11The rationale behind mutualisation of national deposit schemes is that the current system of national Deposit Guarantee Schemes (DGS) remains vulnerable to large local shocks, and that a common deposit insurance scheme would “increase the resilience of the Banking Union against future crises”. The impact of a large bank failure in one participating country would be cushioned by the fact that its depositors were protected by a larger guarantee scheme, reducing the risks of a run on deposits. As the Commission argued:
“The analysis indicates that the number and size of banks for which the Deposit Insurance Fund could handle pay-outs increases significantly for all Member States under EDIS compared to national DGSs.”
2.12Under the original Commission proposal, the EDIS would become operational in three distinct phases:
2.13A national DGS would only benefit from EDIS if its funds are being built up in line with a precise funding path and it otherwise complies with essential requirements under EU law. Contributions into the Deposit Insurance Fund would be made by banks directly using a risk-based methodology, allowing Member States to reduce contributions to their national DGS commensurately. The methodology to calculate each institution’s payments would be set by the Commission, with the support of a qualified majority of Member States, via a Delegated Act.
2.14The Single Resolution Board, which would be expanded to administer the EDIS, would monitor national DGSs and release funds only where clearly defined conditions are met.
2.15The then-Economic Secretary to the Treasury (Harriett Baldwin) submitted an Explanatory Memorandum on the proposal on 10 December 2015. It noted that, as the UK is not in the Banking Union, the EDIS would have no direct impact on the Financial Services Compensation Scheme’s deposit guarantee mechanism.
2.16However, the proposal has divided the Eurozone countries which it would affect directly. Some Member States—notably Germany—are concerned it creates a ‘moral hazard’ by reducing the incentive for participating countries to make their banking sectors safer, as the cost of compensating citizens for lost deposits would be borne by all Eurozone countries. As a result, there is no consensus between Eurozone countries about the appropriate level of risk-sharing in the final phase of the EDIS.
2.17Shortly after the Commission issued its proposal, Member States called for the methodology for calculation contributions into the Deposit Insurance Fund to be set down in the text of the ESID Regulation itself, and not be left for a decision by the Commission through a Delegated Act. There is also some controversy about the use of Article 114 TFEU, on the internal market, as the legal basis for the proposal.
2.18In June 2016, EU Finance Ministers considered the future of the Banking Union, and called on the European Commission to table further legislative proposals to strengthen the prudential resilience of the EU’s banking sector, and reduce the risk of bank failure. They also agreed that political negotiations on the risk sharing elements of the deposit insurance proposal—i.e. the absorption of losses by a national deposit guarantee scheme by the communally-funded EDIS—would only start when “sufficient further progress” had been made on those risk reduction measures (RRM). These latter proposals were published by the European Commission in November 2016 and are still under discussion. We have considered the state of play of the RRM package elsewhere in this Report.
2.19The European Scrutiny Committee last considered the EDIS proposal in September 2016, retaining it under scrutiny.
2.20Technical negotiations at Working Party level continued within the Council throughout 2017. However, in view of the on-going discussions on the RRM package, no substantive progress was made towards adoption of the proposal.
2.21In October 2017 recognising the barriers to adoption of the EDIS Regulation, the Commission proposed a less ambitious approach for the Council to take in its consideration of the proposal. In particular, the Commission suggested that the DIF could provide only liquidity assistance but no loss absorption in the first stage (meaning no risk-sharing); there would be a conditionality test before the EDIS moved to the co-insurance phase; and there would be no full mutualisation after seven years.
2.22On the basis of the Commission’s suggestions and a progress report prepared by the Estonian Presidency, EU Finance Ministers considered the EDIS proposal at their meeting on 5 December 2017. On 8 January 2018 the then-Economic Secretary (Stephen Barclay) wrote to the Committee with an update on the status of the negotiations at this meeting. He noted that the technical discussions within the Council had continued to focus on:
2.23No agreement has yet been reached on any of these technical elements within the Council. It is clear from the Minister’s letter that Member States remain divided between those seeking parallel progress on risk reduction and the EDIS, and those who want to see more progress on risk reduction measures before mutualisation of deposit guarantee schemes is considered.
2.24The Bulgarian Presidency has scheduled the proposal for debate at the ECOFIN Council on 22 June 2018, but, given the state of the negotiations, the Member States are not expected to endorse a general approach at that meeting. The ECON Committee of the European Parliament has not yet adopted its position on the proposal, and has not currently scheduled a vote. It therefore remains to be seen when the EDIS will be approved, if at all.
39 See Commission document .
40 Participation in the Banking Union is mandatory for Eurozone countries and optional for other EU Member States. At present, no non-Eurozone EU countries participate. The existing pillars of the Banking Union are the Single Supervisory Mechanism and the Single Resolution Mechanism for failing banks. See the “Background” section for more information.
41 submitted by HM Treasury (10 December 2015).
42 from Stephen Barclay to Sir William Cash (8 January 2018).
43 The so-called Risk Reduction Measures (RRM) package, which would apply to all EU countries (not just the Eurozone). The Committee considered the implications of the package in its .
44 See paragraph 3.21 for more information on the new Commission approach.
45 and on capital requirements for credit institutions.
46 on deposit guarantee schemes.
47 on the recovery and resolution of credit institutions.
48 on the tasks of the European Central Bank relating to the prudential supervision of credit institutions.
49 European Commission document .
50 on a Single Resolution Mechanism and a Single Resolution Fund.
51 The SRF is meant to achieve a coverage of €55 billion by 2024, funded by contributions from the Eurozone banking sector.
52 European Commission document .
53 See footnote 12.
54 Reinsurance is the practice whereby insurers transfer some of the risks of their balance sheets to another organisation, with the aim of avoiding becoming fully liable for paying out large insurance claim.
55 During the first phase of the DIF, as proposed by the Commission, the Fund could absorb some (limited) losses from providing liquidity assistance to a national Deposit Guarantee Scheme.
56 The losses of a deposit guarantee pay-out are calculated by subtracting the total amount of covered deposits of the failing bank by the proceeds from the insolvency estate acquired by the national Deposit Guarantee Scheme.
57 submitted by HM Treasury (10 December 2015).
58 Financial Times, ““ (17 October 2017).
59 from Simon Kirby to Sir William Cash (17 August 2016).
60 ECOFIN Council, ““ (17 June 2016).
61 The RRM package, which we have considered in more detail in chapter [x] of this Report, consists of six separate legislative texts. Two of those were adopted towards the end of 2017; the other four remain subject to detailed negotiations within the Council and the European Parliament.
62 See Committee .
63 See .
64 Under the Deposit Guarantee Scheme Directive, individual Member States have the discretion to require a third-country branch (including those of UK-based banks after the UK leaves the Single Market) to join a national DGS if the third country protection is not considered as equivalent. Some Member States are concerned that excluding these from the EDIS would create a two-tier system of deposit protection, with deposits held by banks covered by ESID benefitting from more protection than those held by banks outside of its scope.
65 The Commission’s proposal stipulates that EDIS should apply to all banks affiliated to a national DGS, meaning it would also cover financial institutions that fall outside the scope of the other pillars of the Banking Union because they are not covered by the Capital Requirements Directive (CRD). For example, the UK’s National Savings Bank and credit unions are not subject to the CRD.
27 February 2018