by Pr. David Howarth and Pr. Lucia Quaglia

This article is one of five in a recent special issue of the Journal of Economic Policy Reform on ‘Reforming Banking Union’ (volume 21, number 3) edited by professors David Howarth (Luxembourg) and Joachim Schild (Trier). This special issue includes papers by a number of leading economists and political economists working on major Banking Union topics, including the late Professor David Mayes, Shawn Donnelly, Rosaria Cerrone and Katalin Mérő and Dóra Piroska.

In our article, we examine one of the principal missing components of Banking Union. The EDIS was initially listed as one of the four pillars of Banking Union — along with supranational supervision, resolution and a fiscal backstop — but was subsequently shelved because of disagreement among euro area member states, and notably because of German opposition. Although relaunched by the Commission in a November 2015 draft directive, at the time of writing (autumn 2018), the EDIS has yet to be agreed by the member states.

Journalistic reporting on German preferences on the EDIS has stressed moral hazard concerns and the feared imposition of costs upon banks in healthier banking systems, and ultimately the manageability of real and potential bank losses. Ostensibly, in countries with ailing banking systems, the risk of having to resolve banks by resorting to resolution funds and national deposit guarantee schemes (DGS) was much higher than in countries with healthier banks. For Germany, the poor state of public finances in the euro area periphery also increased the likelihood that the costs of resolving ailing banks would have to be mutualised and born by all the euro area member states, not just by the home country.

Our JEPR article presents the argument that national preferences on the EDIS have been determined largely by the structure of existing national DGS, which in turn are closely linked to the configuration of national banking systems. Entrenched differences in national policies have made EU-level negotiations on both the revised DGS Directive (agreed in 2014) and the EDIS difficult. The German government’s moral hazard concerns also stem from the fear that a number of member states — and notably Italy — would have difficulty meeting the target level for ex ante contributions from banks to national DGS agreed in the 2014 revised directive. The German government has feared pressure to construct an EDIS even though some member states have very little in the way of ex ante funds. For the German government, the potential for moral hazard for depositors, banks and governments in euro periphery countries is strong.

The German government does not wish to impose a potential burden upon the joint liability schemes of small German (etc.) savings and cooperative banks to support the DGS in other member states, and thus to fund the depositors of potentially large banks. The importance of banking system structure also becomes clear in the European Commission’s efforts to diminish German opposition to the EDIS. The Commission proposed that savings and cooperative banks be made exempt from having to contribute to the EDIS (Reuters, 2 November 2015). Commission President Juncker argued that it was ‘people who did not follow the virtues of a social market economy’ who caused the financial crisis and that savings banks and cooperative banks were not to blame (authors’ translation, Frankfurter Allgemeine Zeitung, 2 November 2015). However, this concession has not resulted in a shift in German policy, given ongoing concerns about the funding arrangements of the DGS in a number of euro area member states.

The political economy analysis of our article contributes to the growing body of academic literature on Banking Union by explaining national preferences on both the revised DGS directive and the EDIS. These preferences are derived not only from the overall health of national banking systems. They also reflect the structure of national banking systems and pre-existing national DGS. Despite more than sixty years of financial integration in the EU and significant strides forward in the single financial market in recent years, national banking systems remain very distinct, which have complicated the negotiations on both the revised DGS directive and the EDIS, and ensured the persistence of national variation on deposit guarantee schemes.


For further information, please see: Howarth, D. and Quaglia, L. (2018) ‘The Difficult Construction of a European Deposit Insurance Scheme: a step too far in Banking Union’, in Journal of Economic Policy Reform, 21, 3, pp. 190-209.

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