The Unfinished Chapter: Why the European Deposit Insurance Scheme Remains Elusive After Nine Years
Introduction
Imagine a Europe where no matter where you bank, your savings are equally protected. This was the vision when the European Union first proposed the European Deposit Insurance Scheme (EDIS) in 2015, a critical component of the Banking Union. The goal was clear: provide a Europe-wide safety net for depositors, ensuring financial stability across the EU. However, nearly a decade later, the EDIS remains an idea rather than a reality, stuck in a political and economic impasse that highlights divisions within the EU. A compromise for common protection of deposits has proven to be much more demanding than anticipated, with the challenge of striking a delicate balance between debt reduction and debt mutualization at the core of the debate.
The Origins of EDIS – A Response to Crisis
To understand why EDIS has stalled, we must first revisit its origins. In the wake of the 2008 global financial crisis, the EU recognized that fragmented national banking systems posed a threat to the stability of the eurozone. A single financial shock in one country could ripple across borders, as was seen during the European sovereign debt crisis. Banks in countries like Greece, Spain, and Italy faced collapse, while depositors in those countries feared losing their savings. National deposit insurance schemes existed but were only as strong as the country's financial capacity, and the EU realized that a robust, unified solution was needed to prevent future crises from spiralling out of control.
This led to the creation of the Banking Union, with three innovative pillars:
- The Single Supervisory Mechanism (SSM) – Centralizing bank oversight under the European Central Bank.
- The Single Resolution Mechanism (SRM) – Coordinating the orderly resolution of failing banks.
- The European Deposit Insurance Scheme (EDIS) – A proposed system to protect deposits across the eurozone.
While the first two pillars are in place, EDIS, the third and arguably most crucial pillar for depositors, remains conspicuously absent.
The Need for EDIS – Why It Was (and Still Is) Critical
The need for EDIS stems from the uneven distribution of risk across the eurozone's banking system. Currently, national deposit insurance schemes guarantee up to €100,000 per depositor, but the strength of these schemes varies. In times of crisis, weaker economies may struggle to meet these guarantees, leading to potential bank runs that threaten both individual countries and the broader financial system.
EDIS would pool these risks at the European level, creating a shared fund that could be drawn upon in case of bank failures anywhere in the eurozone. The logic is simple: collective risk-sharing reduces the chance of localized crises spreading, making the eurozone's banking system more resilient.
The Political and Economic Roadblocks
Despite its clear benefits, EDIS face continued opposition, particularly from northern European countries like Germany and the Netherlands. Their concerns, as listed below, have created an impasse that has stalled EDIS for nearly a decade. The main points of disagreement come down to:
1. Risk Mutualization Hesitancy
One of the most significant objections comes from wealthier northern countries, like Germany and the Netherlands, who fear that EDIS would force their stronger, more stable banking sectors to shoulder the burden of riskier banks in southern Europe. In essence, these countries worry that EDIS would create a moral hazard, allowing countries with weaker banking systems and higher levels of non-performing loans (NPLs) to rely on collective funds without first improving their own fiscal and banking policies.
2. Sovereignty and National Control
Another factor hindering EDIS is the reluctance of some member states to cede control over their national deposit insurance schemes. Deposit insurance is seen as a key tool for maintaining financial stability, and countries are hesitant to hand over such a critical function to a supranational body like the European Deposit Insurance Fund.
For many, this reflects a broader tension within the EU between deeper integration and the preservation of national sovereignty. Critics argue that transferring this power to Brussels without sufficient oversight or safeguards could weaken national governments' ability to respond to crises in their own banking sectors.
3. Completing the Banking Union Debate
The debate over EDIS is also part of a larger disagreement over how to complete the Banking Union. Some member states argue that other elements of the Banking Union, such as reducing the overall risk in the banking sector and finalizing the regulatory framework for failing banks, should be prioritized before a collective insurance scheme is established. They contend that focusing solely on EDIS without addressing broader financial risks would put the cart before the horse.
Is EDIS Still Possible?
Despite the disagreement among Member States, EDIS is not entirely off the table. In recent years, there have been signs of potential compromise. EU policymakers have floated several proposals for a phased approach to EDIS, which would begin with a reinsurance model—allowing national deposit insurance schemes to maintain control while introducing an EU-level backstop in case of systemic crises.
Additionally, the COVID-19 pandemic, and its ensuing economic fallout, has renewed the focus on the importance of financial stability in Europe. Some argue that the pandemic has created an opportunity for renewed cooperation, as it highlighted the interconnectedness of the eurozone's economies and the risks of fragmented financial policies.
As late as April 2024, the European Parliament's Committee on Economic Affairs, in fact, tried to resolve the blockade by adopting the report on the European Deposit Insurance Scheme this April, the third pillar of the European banking Union designed to protect all deposits below €100,000 across the eurozone. As late as April 2024, the European Parliament's Committee on Economic Affairs, in fact, tried to resolve the blockade by adopting the report on the European Deposit Insurance Scheme this April, the third pillar of the European banking union designed to protect all deposits below €1 However, the mandate for the Parliament to enter into negotiations with the Council had not been voted yet, and it was thus decided that continued work on this file would be pushed to the next legislature.
Conclusion
The European Deposit Insurance Scheme was meant to be the final piece of the puzzle in the EU'ss Banking Union. Yet, after nearly a decade, the scheme remains in limbo, a casualty of European differences and economic realities.
As the global financial landscape evolves and new challenges like digital currencies and fintech reshape the banking sector, the need for a unified, resilient financial system becomes more pressing. However, until Europe finds a way to overcome the deep-seated divisions between north and south, stability and risk-sharing will remain delicate issues for the coming Commission.
Member States must unblock the negotiations on this file as soon as possible, just as the European Parliament. At stake is the credibility of one of the most useful tools the EU has put in place after the financial crisis – the banking union.
Morten Clausen, Director of Financial Regulation
