EU considers alternatives to common bank deposit insurance

BRUSSELS (Reuters) - European Union states put the brakes on a plan to establish a common fund to protect bank depositors and urged to explore alternatives which are likely to reduce the protection of European savers, an EU document seen by Reuters said.

The European Union (EU) flag is seen on a sunny day and blue sky at the Chancellery in Berlin, Germany, April 29, 2016. REUTERS/Fabrizio Bensch

The 28 EU countries are negotiating the setting up of a European deposit insurance scheme (EDIS) that would cover individual deposits of up to 100,000 euros (77061 pounds) in all participating countries.

The European Commission, who proposed the scheme in November, said that by putting national resources together, savers would be better protected with overall lower costs for banks, making the European financial system more stable.

But the plan has never received the backing of Germany and other northern EU states, worried that they may disproportionately pay to rescue depositors in other countries.

In a draft document circulated on Friday among EU delegations, the Dutch presidency of the bloc urged the European Commission to reassess the financial impact of EDIS and to evaluate “possible alternative options”.

The text refers to the alternative plan of “mandatory lending” among national deposit insurance schemes, which would replace the establishment of a single fund.

Under this option, supported by Germany, national funds would have to help banks in other states in case of liquidity crisis affecting deposits.

But “the help is unlikely to be unconditional,” an EU official said, casting doubts on the effective protection of savers if this alternative plan were pursued.

In that case, there would ultimately be no EU backstop for depositors in a new banking crisis, which was the original objective of EDIS and the banking union, the EU flagship project to step up financial stability.

The Dutch presidency, whose six-month mandate expires in July, also proposed to consider reintroducing national veto powers in the legislative process to set up EDIS, or its alternatives.

The Commission’s original plan envisages decisions taken by a majority of member states, while the Dutch said that reverting to unanimity through a so-called “Intergovernmental Agreement” should be considered, a move that is likely to slow down the process.

Reporting by Francesco Guarascio; Editing by Angus MacSwan