Beyond moral hazard arguments: The role of national deposit insurance schemes for member states' preferences on EDIS

Discussions regarding the planned European Deposit Insurance Scheme (EDIS), the missing third pillar of the European Banking Union, have been ongoing since the Commission published its initial legislative proposal in 2015. A breakthrough in negotiations has yet to be achieved. The gridlock on EDIS is most commonly attributed to moral hazard concerns over insufficient risk reduction harboured on the side of northern member states, particularly Germany, due to the weak state of some other member states' banking sectors. While moral hazard based on uneven risk reduction is helpful for explaining divergent member-state preferences on the scope of necessary risk reduction, this does not explain preferences on the institutional design of EDIS. In this paper, we argue that contrary to persistent differences on necessary risk reduction, preferences regarding the institutional design of EDIS have become more closely aligned. We analyse how preferences on EDIS developed in the key member states of Germany, France, and Italy. In all sampled countries, we find path-dependent benefits connected to the current design of national Deposit Guarantee Schemes (DGS) that shifted preferences of the banking sector or significant subsectors in favour of retaining national DGSs. Overall, given that a compromise on riskreduction can be accomplished, we argue that current preferences in these key member states provide an opportunity to implement EDIS in the form of a reinsurance system that maintains national DGSs in combination with a supranational fund.