Exposure of the European Deposit Insurance Scheme to bank failures and the benefits of risk-based contributions

This article provides three analytical contributions to the discussion of the establishment of a European Deposit Insurance Scheme (EDIS). First, it quantifies the exposure of a fully mutualised EDIS to bank failures, examining how the European Deposit Insurance Fund (DIF), with a target size of 0.8% of covered deposits of participating banking systems, would be affected under different stress and bail-in scenarios as well as under different methodological assumptions. Second, the chapter provides a quantitative analysis of how the calibration of deposit insurance risk-based contributions (based on current banks’ risk profiles) affects the distribution of contributions across countries. Third, the analysis aims to investigate whether EDIS would produce any systematic cross-subsidisation between banking sectors in different Member States. The results indicate that a fully-funded DIF could be sufficient to cover pay-outs in a non-systemic banking crisis, which is by design a goal of a deposit insurance scheme while other safety net tools are necessary to deal with systemic crises. Risk-based contributions can and should internalise specificities of a banking system – allowing moving forward with risk sharing measures in parallel with risk reduction measures, tackling moral hazard and avoiding any decrease in EDIS capacity. Furthermore, there would be no unwarranted systematic cross-subsidisation within EDIS in the sense of some banking systems systematically contributing less than they would benefit from the Fund. JEL Classification: G00