- The Finnish financial sector is only willing to accept a European deposit insurance scheme if it is implemented wisely.
- The design of the European deposit insurance scheme must ensure that deposit guarantee scheme funds will not be used to cover losses that should be borne by investors.
- If deposit guarantee scheme funds are used to resolve a bank in any way, they must always be paid back in full.
A common system for deposit protection – the European deposit insurance scheme (EDIS) – is the third pillar of the European banking union. The banking union is currently based on two fully operational pillars: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). It also entails harmonised national deposit guarantee schemes.
The European deposit insurance scheme (EDIS) must not be established without clear rules or without first levelling out the differences between banks in different EU member states. This was the consensus reached in the panel held at Finance Finland’s annual summer party in Helsinki on 13 June.
Speaking on the panel were National Coalition Party’s Member of Parliament and Parliamentary Group Chair Matias Marttinen, Social Democratic Party’s Member of Parliament and Parliamentary Group Chair Tytti Tuppurainen and Executive Chair of Finance Finland’s Board of Directors Sara Mella.
The European Commission first put forward the idea of setting up a European deposit insurance scheme in 2015. The scheme forms the third and final pillar of the banking union. In its current state, the banking union is structured around three dimensions or pillars: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and a mechanism of national deposit guarantee schemes.
In recent years, the EDIS and the completion of the banking union has experienced political tailwinds, with many Southern European members states especially standing in favour of increased economic risk sharing. The panellists, however, would only be willing to adopt a European deposit insurance scheme under clearly defined conditions.
“The Finnish Parliament’s opinion is that if the European deposit insurance scheme is established, it must feature investor bail-in prominently. If investor bail-in is not a key element, the plans cannot move forward”, says Matias Marttinen.
It is yet unclear how the European deposit insurance scheme would be implemented. According to the European Commission’s latest proposal, the bank crisis management and deposit insurance (CMDI) framework would partly forfeit the ‘no bail-out’ principle, meaning that some of the losses of a bank’s investors would be covered from national deposit guarantee funds.
The proposed version of CMDI would cover not only the funds of a failing bank’s covered depositors but also partly the losses that should be borne by its investors. This would shift the investment risk from the investors onto all banks that contribute to the fund and ultimately onto their customers.
The Finnish financial sector, however, is firmly of the opinion that the EDIS should only be established if it is used to protect deposits, not cover the losses of investors.
Not all EU countries are alike
One of the pain points in the European deposit insurance scheme have been the differences between EU countries. Member states have major differences in the health of their economy and banking sector.
Although the European banking sector has developed positively overall, some member states’ banks still have problems to fix. Many banks are also still in the process of collecting a buffer to guarantee their customers’ deposits. The general concern is that if such a bank runs into trouble, the deposit guarantee scheme funds will not be paid back in full.
The differences between member states also worry Tytti Tuppurainen.
“We should be pretty strict about not establishing the European deposit insurance scheme before member states have reached a more level position.”
Because of the different positions of different member states and their banks, Finance Finland has proposed an alternative model to implement a common deposit guarantee scheme that avoids joint liability for losses. This model has received support across parties in Finland.
Executive Chair of Finance Finland’s Board of Directors Sara Mella also sees the different positions of member states to be a barrier to the progress of the European deposit insurance scheme. Moreover, Mella is concerned that if implemented carelessly, the European deposit insurance scheme could in fact increase moral hazard.
Increasing risk sharing must not mean offering direct support to badly run banks and their investors. According to Mella, the European deposit insurance scheme must have clearly defined rules, and these rules must be adhered to.
“The limits of economic risk sharing must be clearly defined, and the role of market discipline must be highlighted. There must also be credible sanctions for violating commonly agreed rules. If a European deposit guarantee scheme is implemented, it must be based on liquidity support in the form of lending and avoid joint liability for losses.”
Although Finnish political parties have slightly different focus areas in their views on economic risk sharing in the EU, they seem to have a broad consensus on the main points. This creates trust in that Finland’s EU policy will continue to focus on responsible economic management and clearly defined practices no matter which parties are in the government.
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