Abstract
This study aims to assess the current institutional arrangements of guarantee schemes in three sectors of the financial services industry (banking, insurance and capital market) in EU countries. Using data collected directly from guarantee schemes and other sources, as well as bank balance sheet data, the research focuses on assessing the financial capacity of the guarantee schemes. The analysis is supported by the illustration of the consequences of a hypothetical failure of global systemically important bank (G-SIB) in the EU and separately in EU countries from Central and Eastern Europe. This is to prove that setting up a pan-European deposit guarantee scheme for banks in the banking union would create a significant financial burden for the European economy. The research points out some policy implications of how to deal with this issue.
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Notes and References
The Icelandic banking sector was experiencing severe tensions after the collapse of Lehman Brothers. On 7 October 2008, the Icelandic government announced that if necessary, it would provide additional funds for the DGS, should it be unable to meet the depositors’ payouts in the event of bankruptcy of the Icelandic bank. However, Iceland refused to guarantee the deposits of foreign branches of Icelandic banks, due to the weak capitalization of the Icelandic DGS, which was in contradiction with EU regulations. This spurred an international dispute between Iceland and the United Kingdom and the Netherlands. As a result, the British and Dutch DGSs paid out guaranteed deposits to customers of Icelandic branches in their countries, while demanding the compensation from the Icelandic authorities.
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on DGSs (later amended by Directive 2009/14/EC of 11 March 2009).
Some countries had established national investor protection schemes before, however, directive set a uniform rules for all EU members.
It means generally a combination of ex ante and ex post funding.
For a study of these issues, see inter alia, Karels, G.V. and McClatchey, C.A. (1999) Deposit insurance and risk-taking behavior in the credit union industry. Journal of Banking and Finance 23(1999): 105–134; Demirgüç-Kunt, A. and Detragiache, E. (2002) Does deposit insurance increase banking system stability? An empirical investigation. Journal of Monetary Economics 49(7): 1373–1406; Hovakimian, A., Kane E. J. and Laeven, L. (2003) How country and safety-net characteristics affect bank risk-shifting. Journal of Financial Services Research 23(3): 177–204; Bartholdy, J., Boyle G.W., and Stover R. D. (2003) Deposit insurance and the risk premium in bank deposit rates. Journal of Banking and Finance 27(4): 699–717; Gropp, R. and Vesala J. (2004) Deposit insurance, moral hazard and market monitoring. Review of Finance 8(4): 571–602, doi: 10.1093/rof/8.4.571; McCoy, P.A. (2007) The Moral Hazard Implications of Deposit Insurance: Theory and Evidence. Paper presented at a Seminar on Current development in Monetary and Financial law, Washington DC, 23–27 October; Angkinand, A. and Wihlborg C. (2007) Deposit Insurance Coverage, Credibility of Non-insurance, and Banking Crises. Working Papers 2005–10, Copenhagen Business School, Department of Finance; Angkinand, A. and Wihlborg C. (2010) Deposit insurance coverage, ownership, and banks’ risk-taking in emerging markets. Journal of International Money and Finance 29(2): 252–274; Hwang, D.-Y., Shie, F.-S., Wang,K. and Lin, J.-C. (2009) The pricing of deposit insurance considering bankruptcy costs and closure policies. Journal of Banking and Finance 33(10): 1909–1919; Forssbaeck, J. (2011) Divergence of risk indicators and the conditions for market discipline in banking. SUERF Studies, SUERF – The European Money and Finance Forum, number 2011/4, May; Ioannidou, V.P., and Penas M. F. (2010) Deposit insurance and bank risk-taking: Evidence from internal loan ratings. Journal of Financial Intermediation 19(2010): 95–115; Anginer, D., Demirguc-Kunt A. and Zhu M. (2014) How does deposit insurance affect bank risk? Evidence from the recent crisis. Journal of Banking and Finance. 48(11): 312–321.
For a study of these issues, see inter alia, Merton, R. (1977) An analytical derivation of the cost of deposit insurance and loan guarantees. Journal of Banking and Finance 1(1): 3–11; Merton, R. (1978) On the cost of deposit insurance when there are surveillance costs. Journal of Business 51(3): 439–476; Allen, L. and Saunders A. (1993) Forbearance and valuation of deposit insurance as a callable put. Journal of Banking and Finance 17(4): 629–643; Chan, Y.-S., Greenbaum S.I. and Thakor A.V. (1992) Is fairly priced deposit insurance possible? Journal of Finance 47(1): 227–245; Freixas, X. and Rochet J.-C. (1998) Fair pricing of deposit insurance. Is it possible? Yes. Is it desirable? No. Research in Economics 52(4): 217–232; Dermine, J. and Lajeri, F. (2001) Credit risk and the deposit insurance premium: a note. Journal of Economics and Business 53(2001): 497–508; DeLong, G. and Saunders A. (2011) Did the introduction of fixed-rate federal deposit insurance increase long-term bank risk-taking? Journal of Financial Stability 7(2011): 19–25.
Those include, inter alia, Episcopos, A. (2004) The implied reserves of the Bank Insurance Fund. Journal of Banking and Finance 28(7): 1617–1635; Kuritzkes, A., Schuermann, T. and Weiner, S. (2005) Deposit insurance and risk management of the U.S. banking system: What is the loss distribution faced by the FDIC? Journal of Financial Services Research 27(3): 217–242; Jones, K.D. and Oshinsky, R.C. (2009) The effect of industry consolidation and deposit insurance reform on the resiliency of the U.S. bank insurance fund. Journal of Financial Stability, Elsevier, 5(1), 57–88.
See Episcopos (2004).
See Kuritzkes et al (2005).
See Jones and Oshinsky (2009).
JRC (2010) JRC Report under Article 12 of Directive 94/19/EC as amended by Directive 2009/14/EC. European Commission, Unit G09, Ispra, Italy, pp. 35–38.
Cariboni, J., Joossens, E. and Uboldi, A. (2010) The promptness of European deposit protection schemes to face banking failures. Journal of Banking Regulation 11 (3): 171–190.
Iwanicz-Drozdowska, M. (2011) Deposit insurance systems – lessons from the crisis for CESEE banking systems. In: A. Csajbók and E. Gnan (eds.) The Future of Banking in CESEE after the Financial Crisis, SUERF Study 2011/1, Vienna.
IMF (2013) A Banking Union For The Euro Area: Technical Background Notes, 13 February, p. 32. IMF. https://www.imf.org/external/pubs/ft/sdn/2013/sdn1301technt.pdf, accessed 23 April 2015.
In fact, in EU countries there are more than 28 DGSs. Some countries, such as, for example, Germany, Austria or Portugal have more than one system of deposit insurance. A multiple system is usually a result of historical circumstances. Both types of systems (compulsory and voluntary) are complementary.
FSB (2012) Thematic Review on Deposit Insurance Systems, 8 February p. 4. Basel, Switzerland: FSB.
The exemption is Croatia, which as the only EU country using the amount of HRK 400 000 which is the equivalent of €50 000. The date of introduction of this limit was 15 October 2008 and it has remained unchanged.
According to the definition of ‘deposit’ from the Article 1, Point 1 of the Directive 94/19/EC.
According to EC wording: deposits obtained from eligible deposits when applying the level of coverage provided for in every national legislation.
According to EC wording: deposits repayable by the guarantee scheme under your national law, before the level of coverage is applied.
EC (2008) Investigating the Efficiency of EU Deposit Guarantee Schemes. Report on DGS efficiency, Joint Research Centre, Unit G09, Ispra, Italy, May.
Belgium, Bulgaria, Croatia, the Czech Republic, Denmark, Estonia, Finland, Germany, Hungary, Latvia, Lithuania, Portugal, Slovakia, Spain, Sweden.
Cyprus, France, Greece, Ireland, Malta, Poland, Romania, Slovakia, the United Kingdom.
Austria, the Netherlands, Luxembourg, Slovenia, Italy.
EC (2010a) Impact Assessment accompanying document to the proposal for a ‘Directive …/…/EU of the European Parliament and of the Council on deposit guarantee schemes [recast]’ and to the report from the Commission to the European Parliament and to the Council ‘Review of Directive 94/19/EC on Deposit Guarantee Schemes’. Brussels, Belgium, Commission Staff Working Document, 834/2.
Austria, Bulgaria, Croatia, Cyprus, Estonia, Finland, Germany, Greece, Portugal, Spain.
Austria, Belgium, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, France, Greece, Hungary, Latvia, Lithuania, the Netherlands, Poland, Slovakia, Slovenia, Romania, Sweden and the United Kingdom.
In two additional countries (Cyprus and the Netherlands), such financing is applicable in the case of one fund that operates within the ICS.
Ex post financing is partially present in the ICSs also in Belgium, Denmark, the Netherlands and Slovenia.
There are a number of EU motor/transport directives imposing on Member States the requirement of dealing with legitimate claims of victims of traffic accidents, where the perpetrator was a person uninsured or unidentified (so it is not the case of bankruptcy of an insurance company).
Belgium, Bulgaria, Denmark, Ireland, Italy, Latvia, Malta and Romania.
They are usually paid on an annual basis as for example in Italy or the German system Protector. There are, however exceptions to this rule with shorter periods of collection, such as the two-month intervals established in Greece.
See EC. (2010a).
EC (2013) Commissioner Barnier welcomes agreement between the European Parliament and Member States on Deposit Guarantee Schemes, Memo, 17 December, http://europa.eu/rapid/press-release_MEMO-13-1176_en.htm.
Based on data from the EC (2010a) Financial Stability Board (2012, for Germany) and DGSs.
Based on the data from EC (2010a, 2010b) Eurostat, Financial Stability Board (2012, for Germany), DGSs, ICSs, IGSs, Oxera (2005) Description and assessment of the national ICSs established in accordance with Directive 97/9/EC. Oxera Consulting Ltd. and Oxera. (2007) IGSs in the EU. Copyright Oxera Consulting Ltd.
Data on the accumulated funds and covered instruments/services refer to the end of 2012 or September 2013, with the exception of Ireland (July 2012) and Belgium (end of 2011). Based on data from the ICSs or, in a few cases when data was not available elsewhere, on Oxera (2005).
Estimated liabilities of IGSs are higher than those of DGSs in four countries: Belgium, the United Kingdom, Denmark and France. The financial capacity of IGSs is weaker than those of their respective DGSs’ (with the exception of the United Kingdom because of deficit). In other cases, liabilities of IGSs in comparison to those of DGSs’ are much lower, especially in CEE countries.
Data based on the European Commission (2010b) The IGSs and Oxera (2007).
Apart from ex post funded schemes, where the coverage ratio is 0%, the lowest ratio was 0.03 per cent in Denmark and ratios higher than 1 per cent were in three countries (Spain – 3.07 per cent, Latvia – 4.82 per cent, Romania – 6.92 per cent).
IAIS (2011) Insurance and Financial Stability, November, IAIS.
Lastra, R.M. (2011) Systemic risk, SIFIs and financial stability. Capital Markets Law Journal 6 (2): 13–14.
BCBS (2011) Global Systematically Important Banks: Assessment Methodology and the Additional Loss Absorbency Requirement. Rules Text. Basel, Switzerland: BCBS, November.
Based on data from financial institutions (2012 year-end), the EC (2010a, 2010b), Eurostat, European Banking Federation, DGSs, ICSs, IGSs, Oxera report (2005, 2007) and FSB (2012).
In the United Kingdom this share exceeds 90 per cent due to high market concentration. The low proportion of G-SIB in banking sector assets in Sweden is due to the fact that Nordea is more active outside of Sweden and 75 per cent of the market in Sweden is dominated by four major banks: Swedbank, Handelsbanken, Nordea and SEB. The Swedish banking market is therefore at the same time highly concentrated, but the high level of concentration does not result from the presence of G-SIBs.
Based on data from financial institutions (2012 year-end), the EC (2010a), Eurostat, European Banking Federation and guarantee schemes.
Of the 9 G-SIBs present in CEE countries, the most active group is Unicredit. It has subsidiaries in each country in the region and the share of subsidiaries’ deposits held in the region to total group deposit is just over 25 per cent. Other G-SIBs with significant presence in the region (taking into account the number of subsidiaries) include Societe Generale and Credit Agricole.
Ayadi, R. and Lastra, R.M. (2010) Proposals for reforming deposit guarantee schemes in Europe. Journal of Banking Regulation 11 (3): 220.
As stipulated by Schoenmaker, D. (2011) The Financial Trilemma. Duisenberg School of Finance – Tinbergen Institute Discussion Papers, No. TI 11-019, Amsterdam, financial trilemma states that (i) financial stability, (ii) financial integration and (iii) national financial policies are incompatible. Any two of the three objectives can be combined but not all three. A policy option is to take the financial trilemma to its logical conclusion and move powers for financial policies (regulation, supervision and stability) further to the European level.
DB Research (2013) EU Banking Union. Right Idea, Poor Execution, September. Frankfurt am Main, Germany: DB Research.
Acknowledgements
The views expressed are purely those of the authors and may not in any circumstances be regarded as an official position of the associated institutions. This article is based on a statutory research grant conducted in 2013 at the Warsaw School of Economics by a team led by Małgorzata Iwanicz-Drozdowska.
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4Master of finance and accounting at Warsaw School of Economics, holds a specialist position at the Polish Financial Supervision Authority. Her main areas of interest comprise guarantee schemes and investor protection, investment funds and credit analysis.
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Iwanicz-Drozdowska, M., Kerlin, J., Smaga, P. et al. EU guarantee schemes: Status quo and policy implications. J Bank Regul 16, 201–219 (2015). https://doi.org/10.1057/jbr.2015.6
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DOI: https://doi.org/10.1057/jbr.2015.6