Thomas Lyons 
A leading banking expert has expressed her concerns over the €100,000 guarantee on bank deposits in the European Union, stating that it is set at too low a level given the current banking turmoil. Lucrezia Reichlin, professor of economics at the London Business School, also warned that there were issues with the powers of global regulators to deal with the collapse of Silicon Valley Bank and other lenders in the US, and to the forced sale of troubled Credit Suisse to UBS in Europe.
In an interview for an IMF blog, Prof Reichlin stated that the deposit insurance in the EU is low, at only €100,000, and there is no systemic risk exemption, unlike in the US. In the US, depositors can expect to be protected in cases where a bank’s collapse would pose a risk to the entire financial system. This, combined with the fact that the banking union doesn’t involve common deposit insurance at the EU level, makes the system fragile.
Prof Reichlin said she expected “other banking crises to happen” if global central banks continued to hike interest rates. She added that the US and the Swiss crises are different. The first involves midsize banks with assets dominated by safe government bonds, whose mark-to-market value declined as interest rates increased, and deposits concentrated on a particular sector. The second involves a very large institution with long-standing idiosyncratic problems more broadly defined.
However, both crises show regulatory failures and poor risk management, and they were both triggered by the increase in interest rates related to the synchronised and harshest monetary policy tightness we have experienced since World War Two. In these circumstances, financial fragility must be expected in those parts of the system which are badly managed, poorly regulated, and more exposed to tight credit conditions.
The European Union has been facing a challenging economic environment since the global financial crisis of 2008. Since then, the EU has implemented a number of measures to strengthen its banking system, including the introduction of the banking union. The banking union is aimed at creating a single supervisory mechanism for banks in the euro area, as well as a single resolution mechanism for dealing with failing banks.
However, the banking union doesn’t include a common deposit insurance scheme, which means that depositors in different EU countries are protected differently. This has led to concerns that the banking union is incomplete and that it doesn’t provide sufficient protection to depositors.
The European Banking Authority (EBA) has been working on a proposal for a European deposit insurance scheme (EDIS) since 2015. The proposal would create a common deposit insurance scheme for all EU countries, which would be funded by contributions from banks. However, the proposal has been met with resistance from some EU countries, who are concerned about the potential costs of the scheme.
Despite the challenges, the EBA remains committed to the proposal. In a recent statement, the EBA said that “the establishment of a fully-fledged European deposit insurance scheme is a necessary complement to the other elements of the banking union and would contribute to the stability of the banking sector in the EU.”
In conclusion, the concerns raised by Prof Reichlin highlight the need for the EU to take further steps to strengthen its banking system. While the banking union has been a positive step, it is clear that more needs to be done to protect depositors and ensure the stability of the banking sector. The proposal for a European deposit insurance scheme is a step in the right direction, but it will require the support of all EU countries to become a reality.
