Options for reforming deposit protection schemes in the EU

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Karel Lannoo, Maria Gerhardt

With the financial crisis, citizens suddenly realized that different levels and forms of depositor protection co-existed in the EU, whereas they had been told for almost 20 years that a single market was in place. Current deposit insurance arrangements in Europe need to be changed, as they match neither market integration nor consumer expectations.

But deposit insurance cannot be considered in isolation; it is part of the broader financial safety net and the crisis resolution tools for banks. Confronted with the question of what action should be taken to draw the right lessons from the crisis, practically the only option is an EU-wide fund, but policy-makers are still hesitant. Any intermediate solution will maintain too many distortions and imperfections and will not provide a coherent response to current challenges.

This policy brief reviews current policy discussions on deposit insurance in the EU. It looks at the role of deposit insurance as part of the (European) financial safety net and examines the Commission’s recent proposal to amend the EU Directive on deposit guarantee schemes (DGS). The three options for a European DGS are assessed, followed by conclusions and recommendations.