EDIS Regulation Advancement

A report regarding the proposed Regulation for the establishment of the European Deposit Insurance Scheme (EDIS) was adopted by the European Parliament on April 18, 2024, marking a significant development. With 26 votes in favor, 18 against, and 3 abstentions, Members of the European Parliament (MEPs) accepted this critical step, which represented a turning point in the development of financial security measures within the EU. The new European Parliament will continue to work on the matter after the June 6–9 European elections, indicating a sustained commitment to supporting the stability of the region's economy.

With a view to improving the current structure of national deposit guarantee schemes (DGS) under the Deposit Guarantee Directive, this effort aims to develop through multiple phases, with a progressive increase of EDIS contributions over time. When all is said and done, bank deposit protection will be entirely covered by EDIS at the end of its deployment, in addition to cooperative efforts with national DGSs. The ECON report's main focus is on EDIS's early phases, whereby it is envisioned as a liquidity scheme that offers participating DGSs essential financial support.

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European Deposit Insurance Scheme (EDIS) | Legislative Train Schedule

As part of banking issues, the European Commission tabled an initiative on European Deposit Insurance Scheme in November 2015.

European ParliamentEuropean Parliament

First Stage of EDIS Proposal Adopted

The European Parliament (MEPs) has approved a proposal that launches the European Deposit Insurance Scheme (EDIS). EDIS is a liquidity mechanism that lends money to deposit insurance schemes that are participating in it. With 26 votes in favor, 18 against, and 3 abstentions, the Economic and Monetary Affairs Committee's approval highlights MEPs' dedication to strengthening the Banking Union and advancing toward a comprehensive insurance program across the EU. Deposit guarantee schemes (DGS) would be shielded from regional economic shocks during this phase, with the ultimate goal of obtaining complete coverage under EDIS in later phases. The new regulations, which require ex-ante contributions from DGSs, are notably restricted to banks connected to participating DGSs. Their goal is to reduce risks to the European Deposit Insurance Fund and to reduce moral hazard at the national level.

Financial Stability: The Role of the Deposit Insurance Fund in EDIS I Proposal

Within the framework of the EDIS I concept, the Deposit Insurance Fund (DIF) is a crucial element meant to support resilience and financial security. It serves to provide liquidity support for bank resolutions by making use of deposit guarantee schemes' (DGSs') financial resources for payouts or precautions. The plan also specifies the powers of the Single Resolution Board (Board) in managing and utilizing the DIF, which would be financed by transfers from DGSs that are involved. This piece explores the essential features of the DIF and how important it is to maintaining stability in the financial system:

• Liquidity Support: In the event of bank resolutions, the DIF offers essential assistance for liquidity by using the funds of DGSs for payouts or preemptive actions.

• Single Resolution Board Powers: The proposal delineates the authorities of the Single Resolution Board with respect to the management and use of the DIF, with the aim of guaranteeing efficient financial resource administration.

• Funding Mechanism: Within three years, the DIF is expected to have accumulated 50% of the national DGS target level, thanks to transfers from participating DGSs.

• Contribution Calculation: To promote equitable and harmonized contributions while encouraging less hazardous operational models, contributions to both EDIS I and participating DGSs are computed based on covered deposits and a risk-adjustment factor per bank.

Operational Mechanisms of the Deposit Insurance Fund

Gaining an understanding of the Deposit Insurance Fund's (DIF) workings is essential to appreciating its role in preserving financial stability. The DIF's procedural stages are explained in this article, along with the safeguards implemented to provide adequate liquidity assistance and equitable contribution distribution amongst participating Deposit provide Schemes (DGSs).

Stages of the procedure:

• Required Lending: In the event that the DIF funds are insufficient to support liquidity, participating DGSs are required to lend to the DIF upon request from the Board. This loan has a three-year build-up period before it is capped at 30%.

• Repayment Plan: A DGS is required to return the liquidity support granted by the DIF within a period of six years. Up to DGS contributions to the DIF, liquidity support is provided without interest. To encourage prompt repayment, interest is applied to sums over these contributions.

• Contribution Transfer: The Board makes ensuring that funds are moved between and among participating DGSs in an equitable manner. The Board may postpone contribution transfers to the DIF for a maximum of six years in the event that a DGS is not financially viable.

• Funds Availability: MEPs suggest that during the DIF's three-year build-up phase, a larger percentage of the funds in participating DGSs should be made obligatory for lending. It is recommended that member states investigate ways to increase the DIF's borrowing capacity, particularly through financial markets.

• Future Considerations: MEPs believe that the Commission will evaluate the possibility of expanding EDIS I's role from supporting liquidity to a full insurance program that includes loss coverage. The completion of the Banking Union would eventually be advanced by the legislative recommendations that would result from this examination.

Findings from the Deposit Insurance Fund Report

The Deposit Insurance Fund (DIF) report provides a wealth of information about the operating procedures and steps that are essential to guaranteeing financial stability in the European Union. The paper provides a comprehensive framework for enhancing the resilience of participating Deposit Guarantee Schemes (DGSs) by clarifying mandatory lending provisions, repayment plans, contribution transfers, and future considerations. The report's suggestions provide a fundamental cornerstone for promoting a more stable and secure financial environment as policymakers work to manage changing financial environments and promote the Banking Union.