## The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union

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### Introduction — role, post-GFC reforms, EU changes
- Principal public policy objectives of deposit insurance: to protect depositors and contribute to financial stability.
- Deposit insurance minimizes deposit runs and contagion risk by protecting retail and other small depositors.
- Historical runs during the GFC 2008–09 cited: Iceland, the Netherlands, United Kingdom, and the United States.
- Post-GFC reforms included:
  - higher coverage levels;
  - elimination of coinsurance;
  - faster payouts;
  - ex ante funding;
  - restrictions on using deposit insurance funds (DIFs) for open bank assistance outside of resolution;
  - better interagency cooperation.
- International benchmarks adoption:
  - Core Principles for Effective Deposit Insurance Systems adopted in 2009 and revised in 2014.
  - Assessment Methodology adopted in 2010 and replaced in 2016 with an Assessment Handbook.
- EU legislative changes:
  - 2009 DGSD amendment: increased minimum coverage from €20,000 to €100,000 (phased with intermediate step at €50,000); shortened payout period to 20 working days.
  - 2014 DGSD harmonization: fixed coverage level of €100,000 per depositor per bank (with higher coverage for certain life events); seven-working-day payout effective January 1, 2024 (reduced from 20 working days in three phases); risk-based premiums to reach a minimum level of 0.8 percent—or exceptionally, 0.5 percent—of covered deposits by July 3, 2024.
  - 2014 introduction of BRRD and the banking-union institutions (ECB, SRB, SRF) but without a supranational DIS.

### Interaction of DIS with resolution and identified EU problems
- BRRD envisages using DIFs in resolution up to the net cost the DIS would have incurred if the failing bank had been liquidated and deposit insurance paid (Article 109 BRRD; Article 11.2 DGSD).
- Interpretation of BRRD has:
  - restricted DIS contributions to resolution; and
  - facilitated DIS contributions to support weak banks outside resolution.
- European Commission consultation (early 2021) identified five problems:
  - incentives to use tools outside resolution;
  - differences across national insolvency regimes;
  - sub-optimal legal certainty and predictability;
  - insufficient market integration hindering resilience and efficiency;
  - discrepancies across member states in DIS functioning and protection.
- Commission’s main consequences: un-level playing field; barriers to the single market; persisting risks to financial stability; adverse effects on depositor confidence; inefficient liquidation outcomes; risks of taxpayer exposure and potential adverse impact on government finances.
- Concerns about medium-sized banks:
  - Some SIs’ loss-absorbing capacity set equal only to minimum equity (SRB, 2021), risking depletion at failure (Koenig, 2021).
  - Failures of small- and medium-sized banks can raise financial stability concerns (Luis de Guindos, ECB Vice-President).
  - Many failed SIs were liquidated nationally rather than resolved; BRRD has fallen short of forestalling taxpayer bailouts (Gelpern and Véron, 2020).

### Reform priorities recommended by the paper
- Establish a new common DIS and make resolution—not liquidation with a deposit insurance payout—the norm.
- Introduce an administrative liquidation tool for the SRB and NRAs to use instead of court-based, diverging national liquidation proceedings.
- Increase funding and backstops for deposit insurance and remove constraints on use of DIFs and resolution funds for resolution and liquidation tools, other than deposit insurance payouts.
- Rationale: prevent banks that are “too small for resolution and too large for liquidation” (Koenig, 2020; Koenig, 2021).

### International expectations and best practices for DIS
- DIS effectiveness depends on complementarity with prudential supervision and bank resolution.
- IADI Core Principles emphasize:
  - DIFs may fund resolution measures subject to cost safeguards (CP9, EC8).
  - Deposit insurer can transfer deposits as alternative to direct payouts (CP2, EC4; CP15, EC4).
  - Credible arrangements for prompt reimbursements: ex ante funding, borrowing arrangements, and fiscal backstops (CP9).
  - Deposit insurer should be full member of national crisis management arrangements (CP6 and EC3) and involved in resolution decisions (CP9, EC8a; CP14, EC1).
- P&A (partial transfer / purchase and assumption) is a time-tested, cost-effective resolution tool; it is the preferred method in the United States (IMF, 2020a).
- Public DIAs with autonomy from government and industry may be better placed to contribute to resolution and crisis management.

### Fragmentation from national discretions and implementation gaps
- Over a dozen DGSD provisions allow national discretion (Annex III), contributing to fragmentation (exceptions to scope, coverage, repayment periods, calculations).
- 2018 EA FSAP within the banking union found:
  - 6 countries opted for a target level of covered deposits below 0.8 percent;
  - 12 countries opted for a deadline beyond 2024 for the target level, including the 6 countries with a lower target level;
  - 10 countries do not allow their DIS to lend to other national deposit insurers;
  - 12 countries do not allow DIFs to be used to effect deposit transfers in national liquidation proceedings.

### Underfunded DIS and inter-DIS shortcomings
- May 2021 EBA Deposit Guarantee Schemes Data: 34 out of 36 DIS in the EU, Iceland, Lichtenstein, and Norway increased funds in 2020, but only 18 DIS have reached the minimum target level of 0.8 percent of covered deposits.
- IADI recommends DIF size sufficient to participate in resolution and payout of several failures depending on banking sector composition.
- Given concentrated banking sectors, even DIFs at 0.8 percent may be insufficient.
- Several EA FSAPs noted backup credit lines with national governments are not operationalized and inter-DIS arrangements are not operationalized.
- EBA (2020): it is not possible to compare the adequacy and resiliency of each national DIS in the EU.
- EBA peer review of national DIS stress tests found divergence in types of tests and reporting, hindering robust resilience comparisons.

### Legal, state aid, and bail-in constraints limiting DIS use
- Use of transfer powers in the EU is subject to significant impediments; few countries used DGSD discretion to allow DIS to fund transfer of covered deposits in national liquidation.
- SRB does not consider using DIS funding in resolution because it lacks legal authority to access national DIS.
- Strict interpretation of Article 109 BRRD prevents DIS from providing upfront support greater than its estimated liquidation cost net of recoveries, which can inhibit P&A and bridge-bank operations.
  - Text example: scenario contrasting insured deposits of $60, a payout cost net of recoveries for the DIS estimated at €5, and a potential transferee accepting €45 of “good” assets — current interpretation prevents the DIS injecting the €15 difference even if estimated resolution costs for the DGS, net of recoveries, were €0.
- State aid rules treat industry-funded DIFs and resolution funds as state aid unless the DIS is voluntary, discouraging P&A transactions and lengthening procedures.
- Mandatory 8 percent bail-in requirement to access the SRF and national public funds during the transition period ending January 1, 2024, and potential steady-state problems.
- Five percent cap on SRF financing noted as an additional constraint.
- Undesirable national responses include resorting to national liquidation regimes, voluntary DIS schemes, and open bank assistance outside resolution.

### Lack of EDIS, inter-DIS liquidity, and systemwide crisis arrangements
- No comprehensive European Deposit Insurance Scheme (EDIS) implemented; political progress stalled.
- Inter-DIS lending arrangements not fully operationalized; national DIF funding often not readily available for inter-DIS lending.
- EBA Deposit Guarantee Schemes Data indicates around €60 billion in available financial means in all national DIFs together, but some amounts are nominal and not actually held by DIFs.
- No governance/legal arrangements to coordinate a systemwide crisis response at EU level; BRRD and SRM implement bank-by-bank regimes involving many actors without a single integrated crisis-management forum.

### Policy recommendations to mainstream resolution and strengthen DIS
- Make resolution—not liquidation—the default:
  - Make sale-of-business tools and DIS funding available to resolution authorities.
  - SRB and NRAs could adopt policy that all bank failures could potentially meet the public interest test under SRMR and BRRD.
  - Establish an administrative bank liquidation tool for SRB and NRAs to transfer assets and liabilities consistently.
- Strengthen DIS funding, backstops, and cooperation:
  - Assess sufficiency of the 0.8 percent target level using EBA criteria; favor a more prudent approach.
  - Ensure all member states authorize their national DIS to lend to any other national DIS and operationalize inter-DIS lending facilities.
  - Implement EDIS to pool risk across the banking union; EDIS will require a fiscal backstop that could be provided by the European Stability Mechanism (ESM) as agreed by the Eurogroup.
- Reduce legal and state aid constraints:
  - Change interpretation of directives/regulations to allow a DIS to disburse gross funding upfront in a resolution up to the value of covered deposits when resolution costs net of recoveries are no higher than in liquidation.
  - Clarify in the 2013 Banking Communication that a partial transfer protecting only insured depositors and backed by good assets would be automatically compatible with state aid rules, subject to least-cost safeguard.
  - Determine “fair and open” sale-of-business procedures among Commission, resolution authorities, and DIS in advance.
  - Consider paring back state aid oversight or presuming clearance for SRB resolution decisions for supranational common funds.
- Introduce flexibility for financial stability:
  - Introduce a financial stability exemption to the mandatory bail-in requirement to access resolution funds, DIFs, and government stabilization tools, subject to strict conditionality and balanced decision-making.
- Create comprehensive crisis management framework:
  - Establish a mechanism or committee integrating ESAs, ESRB, ECB, SRB, European Commission, SRF, and ESM to manage systemwide crises.

### Selected operational and legal benchmarks drawn from FSAPs and annexes
- Establish EDIS with a backstop arrangement.
- Introduce a financial stability exemption from:
  - (i) the 8 percent mandatory bail-in for accessing the SRF and public funds;
  - (ii) the 5 percent cap on SRF funding;
  - (iii) the proposed stricter state aid burden-sharing rules.
- Align state aid burden sharing in liquidation with BRRD/SRMR subject to a financial stability exemption.
- Ensure DIS financing of deposit transfers in both resolution and liquidation; operationalize inter-DIS lending facilities in all EA countries.
- Strengthen legal and operational independence of deposit insurers; exclude active bankers from deposit insurer boards.
- Commit publicly to a seven-day payout period for insured deposits where applicable.
- Legal/DGSD options cited:
  - Target level deadline beyond 2024 and option for a target level below 0.8 percent under Art 10(2) and Art 10(6);
  - Use of deposit insurance funds for alternative measures and deposit book transfers in national liquidation proceedings under Art 11(3) and Art 11(6);
  - Lending to other EU deposit insurers under Art 12(1).

*Source: INTRODUCTION and selected sections, IMF Working Paper — The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union.*

### INTRODUCTION ...........................................................................................................

### INTRODUCTION

### Role and objectives of deposit insurance
- Principal public policy objectives: to protect depositors and contribute to financial stability.
- By protecting retail and other small depositors in a bank failure, deposit insurance minimizes the risk of deposit runs and mitigates contagion risk.
- If depositors trust a DIS, they are less likely to run on a bank and exacerbate liquidity stress, which would undermine recovery or resolution measures.
- Historical examples of runs during the GFC 2008–09: Iceland, the Netherlands, United Kingdom, and the United States.
- IADI Core Principles observation: “The evolution of the crisis showed the importance of maintaining depositor confidence in the financial system and the key role that deposit protection plays in maintaining that confidence.”

### Post-GFC enhancements and international standards
- Reforms after the GFC include:
  - higher coverage levels;
  - elimination of coinsurance;
  - faster payouts;
  - ex ante funding;
  - restrictions on using deposit insurance funds (DIFs) for open bank assistance outside of resolution;
  - better interagency cooperation.
- Adoption timeline for international benchmarks:
  - Core Principles for Effective Deposit Insurance Systems adopted in 2009 and revised in 2014.
  - Assessment Methodology adopted in 2010 and replaced in 2016 with an Assessment Handbook.
- FSB 2012 peer review: “the role of deposit insurance in promoting financial stability has taken precedence over concerns about contributing to moral hazard [and that] just over half of all respondents expanded [deposit insurance] coverage...and made structural improvements to their national schemes.”
- Demirgüç-Kunt et al., 2014: deposit insurance became more widespread, and with higher coverage since the GFC.

### EU legislative and institutional changes
- 2009 amendment to the DGSD:
  - increased minimum coverage level from €20,000 to €100,000 (phased in with an intermediate step at €50,000);
  - shortened payout period to 20 working days.
- 2014 harmonization of national DIS:
  - fixed coverage level of €100,000 per depositor per bank (with higher coverage for certain life events);
  - a seven-working-day payout of deposits (effective January 1, 2024; reduced from 20 working days in three phases);
  - risk-based premiums to be paid by banks into their national DIS to reach a minimum level of 0.8 percent—or exceptionally, 0.5 percent—of covered deposits by July 3, 2024.
- 2014 introduction of the Bank Recovery and Resolution Directive (BRRD) and the “banking union” institutions (ECB, SRB, SRF), but without a supranational DIS.

### Interaction of DIS with resolution under EU law
- BRRD envisages using DIFs in resolution up to the net cost the DIS would have incurred if the failing bank had been liquidated and deposit insurance paid (Article 109 of the BRRD; Article 11.2 of the DGSD).
- The interpretation applied to the BRRD has:
  - restricted the ability of a DIS to contribute to bank resolutions; and
  - facilitated contributions from some DIS to support recovery of weak banks outside of resolution.

### Ongoing EU review and identified problems
- European Commission consultation (early 2021) on BRRD, DGSD, and SRM Regulation identifies five problems:
  - incentives to use tools outside resolution;
  - differences across national insolvency regimes;
  - sub-optimal legal certainty and predictability;
  - insufficient market integration, particularly in the banking union, hindering resilience and efficiency;
  - discrepancies across member states in the functioning of, and the protection provided by, deposit insurance.
- Commission’s stated main consequences: un-level playing field and barriers to the single market; persisting risks to financial stability; adverse effects on depositor confidence; inefficient outcomes in liquidation leading to excessive loss of franchise value; risks of taxpayer exposure and potential adverse impact on the stability of government finances.
- These issues were highlighted in the Euro Area FSAP (IMF, 2018).

### Concerns for medium-sized banks
- Medium-sized banks may be SIs or LSIs under SRM terminology.
- For some SIs, loss-absorbing capacity has been set equal only to minimum equity (SRB, 2021), leading to the risk that it “might have been, or rather most likely has been, depleted at the point of failing or likely to fail leaving little room for resolution” (Koenig, 2021).
- Observers’ concerns:
  - Failures of small- and medium-sized banks can raise financial stability concerns (Luis de Guindos, ECB Vice-President).
  - Solutions often found outside the BRRD framework because its rigid requirements may not ensure financial stability (Irene Tinagli).
  - Most SIs that failed since the banking union were subject to national liquidation proceedings rather than resolution; “the BRRD has fallen short of its principal goal of forestalling taxpayer bailouts” (Gelpern and Véron, 2020).

### Paper’s reform priorities
- Effective management of bank failures of small- and medium-sized banks in the EU requires reforms in three areas:
  - Establishing a new common DIS and making resolution—not liquidation with a deposit insurance payout—the norm for dealing with failing banks.
  - Introducing an administrative liquidation tool that the SRB and NRAs could use instead of relying on court-based and diverging national liquidation proceedings; objective: “to introduce a special administrative regime for bank liquidation with the maximum level of harmonization” (Enria, 2021).
  - Increasing funding and backstops for deposit insurance and removing constraints on the use of DIFs and resolution funds for resolution and liquidation tools, other than deposit insurance payouts.
- Without these changes, the EU will continue to face banks that are “too small for resolution and too large for liquidation” (Koenig, 2020; Koenig, 2021).

---

### I. International expectations for deposit insurance systems — key points
- Complementarity and interdependency of DIS, prudential supervision, and bank resolution; DIS effectiveness depends on the broader environment.
- Sound governance and statutory protection for financial safety net agencies are required (IADI Core Principles).
- IADI Core Principles prescribe:
  - DIFs have the option—subject to cost safeguards—to fund resolution measures (CP9, EC8).
  - Deposit insurer authorized to transfer deposits to another bank as alternative to direct payouts (CP2, EC4; CP15, EC4).
  - Credible arrangements for prompt reimbursements: ex ante funding, borrowing arrangements, and fiscal backstops (CP9).
- The partial transfer tool / purchase and assumption (P&A) is a time-tested, cost-effective resolution tool that keeps depositors’ access to insured deposits and preserves going-concern value; P&A is the preferred method for failed deposit-taking institutions in the United States (IMF, 2020a).
- Deposit insurer should be a full member of national crisis management arrangements (CP6 and EC3) and involved in resolution decisions (CP9, EC8a; CP14, EC1).
- Public DIAs with autonomy from government and industry may be better placed to contribute to resolution and crisis management due to:
  - confidentiality and governance concerns for private/hybrid DIAs in information sharing and participation in early detection, intervention, resolution, and crisis management;
  - legal protection issues for DIA decision-makers, staff, and agents if not civil servants.

### II. The current state of deposit insurance in the European Union — recurring IMF FSAP themes
- Need for stronger DIS with better governance and ex ante funding (including backstops).
- Need for a mandate to fund resolution and liquidation tools beyond deposit insurance payouts.
- Access to public funds for resolution measures subject to safeguards.
- National fragmentation issues:
  - EU passporting can misalign the size of banking presence in a member state with the capacity of the national DIF; deposit taking by branches or subsidiaries can leave host jurisdictions vulnerable if the home DIF is unwilling or unable to pay (Icesave example).
  - National discretion under EU financial legislation leads to divergences that may impede consumer choice and cross-border provision of services, hampering the EU Single Market (EBA, 2019).

*Source: INTRODUCTION, IMF Working Paper (The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union).*

### 8.   National discretions and differing progress in implementation contribute to a still fragmented DIS in

### 8.   National discretions and differing progress in implementation contribute to a still fragmented DIS in

### Fragmentation from national discretions and implementation progress
- Over a dozen provisions in the DGSD provide for national discretion (Annex III), including exceptions to scope and coverage, repayment periods, and calculations—contributing to continued fragmentation.
- 2018 EA FSAP findings within the banking union:
  - 6 countries opted for a target level of covered deposits below 0.8 percent;
  - 12 countries opted for a deadline beyond 2024 for the target level, including the 6 countries with a lower target level;
  - 10 countries do not allow their DIS to lend to other national deposit insurers; and
  - 12 countries do not allow DIFs to be used to effect deposit transfers in national liquidation proceedings.

### Underfunded Deposit Insurance Schemes (DIS)
- May 2021 EBA Deposit Guarantee Schemes Data: 34 out of 36 DIS in the European Union, Iceland, Lichtenstein, and Norway increased their funds in 2020, but only 18 DIS have reached the minimum target level of 0.8 percent of covered deposits.
- IADI prescription: target DIF size should be “sufficient to participate in the resolution and payout of a number of small bank failures or several medium-sized bank failures, depending on the size and composition of the banking sector.”
- Given concentrated banking sectors in many EU countries, even DIFs at the 0.8 percent target level may not be sufficiently funded.
- Several EA country FSAPs noted that backup credit lines with national governments are not operationalized and readily available to DIS, nor are inter-DIS funding arrangements operationalized.
- EBA (2020): it is not possible to compare the adequacy of funding and resiliency of each national DIS in the EU.
- EBA peer review of national DIS stress tests (covering 135 stress tests by 32 DIS from 27 EU member countries) found divergence in types of tests and reporting, making consistent comparison and robust conclusions regarding resilience challenging.

### European legal and institutional constraints on DIS use
- Key Attributes require legal frameworks to provide for payouts and transfers of (insured) deposits in resolution or liquidation; however, use of transfer powers in the EU is subject to significant impediments.
- Few EU countries used DGSD discretion to allow DIS to fund transfer of covered deposits in national liquidation regimes (Annex III).
- National liquidation regimes have been more frequently deployed than the BRRD to resolve failed banks in the euro area.
- The SRB does not consider using DIS funding in resolution because it lacks legal authority to access national DIS.
- European authorities’ strict interpretation of Article 109 BRRD prevents DIS from providing upfront support greater than its estimated cost (net of recoveries in liquidation) without considering recoveries that could accrue in certain resolutions (most notably, a P&A).
  - Example from text: If a failed bank’s insured deposits of $60 were paid out and the cost net of asset recoveries for the DIS is estimated at €5, a resolution transferring deposits of €60 backed by assets may face a transferee accepting only €45 of “good” assets; current interpretation would prevent the DIS injecting the €15 difference even if estimated resolution costs for the DGS, net of its recoveries, were €0.

### State aid rules and their effects on resolution options
- EU state aid rules treat industry-funded DIFs—and resolution funds, including the SRF—as state aid unless the DIS is voluntary rather than mandated.
- This consideration discourages P&A (purchase-and-assumption) transactions because potential state aid scrutiny can:
  - Make P&A very difficult;
  - Make transfers more likely to be limited to cash and insured deposits—excluding good financial assets and infrastructures—reducing asset recoveries and increasing costs for DIS; and
  - Severely discourage potential purchasers due to burdensome, drawn-out, and uncertain state aid procedures.
- Box summary (TFEU Articles):
  - Article 107(1) TFEU prohibits aid granted by a Member State or through State resources that distorts competition and affects trade between Member States.
  - Article 107(2) TFEU provides exemptions (e.g., social aid, natural disasters).
  - Article 107(3) TFEU provides that some aid may be compatible with the internal market, including to remedy a serious disturbance in the economy of a Member State; the “serious disturbance” exception is currently used.
  - 2013 Banking Communication and subsequent Commission practice: the “serious disturbance” derogation is applied only as long as the crisis situation persists.
  - European Court of Auditors (ECA 2020) noted the Commission had not properly evaluated its crisis rules since 2013, leaving rules unchanged despite regulatory overhaul including BRRD.

### Bail-in requirement and systemwide crisis constraints
- Mandatory 8 percent bail-in requirement for accessing the SRF and national public funds, including DIFs and resolution funds.
  - This requirement applies during the transition period ending January 1, 2024, for MREL build-up, but could also pose steady-state problems.
  - Bail-in of debt securities during systemwide stress could unleash spillovers, trigger contagion, and exacerbate a systemwide crisis.
- Additional constraint: five percent cap on SRF financing of resolution measures (noted).

### Undesirable national responses to EU constraints
- Some countries may resort to national liquidation regimes to circumvent the SRM/BRRD 8 percent bail-in constraint; most bank failures since establishment of the banking union were addressed under national liquidation regimes with government financial support.
- Diverging national liquidation regimes may have less stringent loss-sharing under state aid rules than BRRD/SRM, potentially creating “parallel resolution regimes.”
- Some countries may resort to privately run, voluntary DIS to circumvent state aid rules (example: Italy’s FITD voluntary scheme established in 2015).
  - Voluntary DIS increases costs and risks for the banking sector.
  - Voluntary DIS offering unlimited guarantees exposes the state to contingent fiscal risks if government backstopping becomes necessary.
- Fund staff recommendation: avoid using DIFs for open bank assistance (prevention outside resolution or liquidation); such support should, if required, be extended by the fiscal authority.
- EBA recommended the Commission consider amending the 2013 Banking Communication and address potentially different consequences for DIS depending on legal status and governance structure.

### Lack of European Deposit Insurance Scheme (EDIS) and inter-DIS arrangements
- 2015 Five Presidents’ call for a common DIS (EDIS) argued common deposit insurance would increase resilience and be more likely fiscally neutral over time because risks are spread and private contributions are raised over a much larger pool.
- Commission proposal (November 2015) envisaged a staged EDIS: re-insurance; co-insurance; and full insurance, with national DIS remaining local interface for contributions and payouts.
- October 2017 Commission suggested a more gradual, conditional EDIS with liquidity and loss-absorbing phases split aiming for a fully functional EDIS by 2024 under the updated proposal.
- Political progress stalled: Euro Summit invitation (December 2020) to prepare a stepwise work plan did not mention EDIS; Eurogroup discussions through June 17, 2021 concluded “more work is needed to reach consensus on a work plan.”
- Inter-DIS lending arrangements have not been fully operationalized:
  - Funding collected by national DIS sits in DIFs without being readily available for inter-DIS lending.
  - 2018 EA FSAP: voluntary arrangements to allow DIS to lend to each other are meant to supplement low balances and nine member states have taken advantage of the option, but not all have operationalized lending arrangements.
  - EBA Deposit Guarantee Schemes Data shows around €60 billion in available financial means in all national DIFs together, but some amounts are nominal and not actually held by DIFs, rendering them dependent on national fiscal space at time of banking failure.

### No comprehensive European crisis management arrangements
- No governance and legal arrangements to bring together all agencies needed for a systemwide crisis response at EU level.
- BRRD and SRM implement a bank-by-bank regime involving many actors: SRB (two board compositions), relevant NRAs, two directorates of the European Commission (DG FINMA and DG COMP), the ECB as supervisor, relevant DIS (mandatory or voluntary), possibly the Council if deadlock arises, and the ESM as SRF backstop.
- No complementary framework that brings together fiscal and all financial safety net agencies in the event of a systemic crisis.
- EU lacks a fiscal authority akin to a national Ministry of Finance and there is no EDIS or official mechanism to represent national DIS.

### Toward a stronger role for deposit insurance — Mainstreaming resolution
- Resolution—not liquidation—should be the default approach for banks.
- Required measures:
  - Make sale-of-business tools and DIS funding available to resolution authorities.
  - SRB and NRAs could make a policy decision that all bank failures could potentially meet the public interest test under the SRMR and BRRD.
  - Establish an administrative bank liquidation tool vested in the SRB and the NRAs to transfer assets and liabilities and to be usable potentially for all banks.
  - Consistent powers would help ensure residual parts of resolved banks are liquidated similarly throughout the banking union and the European Union.

### Toward a stronger role for deposit insurance — Strengthening DIS
- January 2020 EBA proposed improvements to the DGSD (EBA 2020a), including:
  - Setting an appropriate deadline for the reduced (0.5 percent) DIF targets;
  - Clarifying whether there is a hierarchy or sequence in which different funding sources can be used by a DIS (different interpretations across the European Union);
  - Clarifying what costs should be considered if DIFs are used for interventions other than payouts (e.g., preventive and other alternative measures);
  - Clarifying the use of failed banks’ assets for depositor payouts.

*IMF Working Paper excerpt: "The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union."*

### 19.   It is critical that DIFs are well funded and backstopped. This is particularly important because,

### 19.   It is critical that DIFs are well funded and backstopped. This is particularly important because,

### Funding, authorization, and inter-DIS cooperation
- Assess the sufficiency of the 0.8 percent target level for DIFs following the EBA’s advice and using its criteria; favor a more prudent approach.
- Ensure all member states authorize their national DIS to lend to any other national DIS.
- Operationalize inter-DIS lending facilities so they are readily available.

### European Deposit Insurance Scheme (EDIS) and fiscal backstop
- Implement EDIS to pool risk across the banking union; risk pooling would:
  - Help member states avoid disruptions that may overwhelm individual capacities.
  - Make risk sharing more effective in protecting confidence and diversifying risks across banks.
- EDIS will require a fiscal backstop that could be provided by the European Stability Mechanism (ESM) as agreed by the Eurogroup.

### Reducing constraints on DIS disbursements
- Change interpretation of relevant directives and regulations to allow a DIS to disburse gross funding upfront in a resolution:
  - Permit a gross contribution from the DIS up to the value of covered deposits (the amount the DIS would have paid upfront in cash in a liquidation) if the estimated cost to the DIS, net of recoveries in resolution, would be no higher than in liquidation and payout.
  - Rationale: without such flexibility, partial transfer and bridge bank powers may not work in precipitous failures or crises when cash must be injected to back deposits.
- Facilitate DIS funding for certain resolution measures under state aid rules:
  - Clarify in the 2013 Banking Communication, subject to the least-cost safeguard, that a partial transfer protecting only insured depositors (and backed by good assets) would be automatically compatible with state aid rules.
  - Determine “fair and open” procedures for sale of business operations in advance among the Commission, resolution authorities, and the DIS to mitigate competition distortion risks.
  - Consider paring back state aid oversight procedures, or presuming clearance for SRB resolution decisions rather than national authorities, given use of supranational common funds paid for by the industry and subject to a financial stability mandate.

### Introducing flexibility: financial stability exemption
- Introduce a financial stability exemption to the mandatory bail-in requirement to access resolution funds, DIFs, and government financial stabilization tools:
  - Exemption should be subject to strict conditionality and a decision-making structure balancing banking union and member state interests.
  - Conditionality based on documented, severe risks to the financial system of a member state as a whole, or of the euro area.
  - Exemption would also have to apply to restructuring and burden-sharing requirements under the 2013 Banking Communication.
  - Governance arrangements for such an exemption could evolve while the banking union is further completed.

### Comprehensive crisis management framework
- Complement the bank-by-bank resolution framework with arrangements to manage a systemwide crisis:
  - Establish a mechanism or committee with a holistic perspective integrating the crisis-related work of the European Supervisory Agencies, the European Systemic Risk Board, the ECB, the SRB, the European Commission, and the banking-union funding facilities (at a minimum, the SRF and the ESM).
  - Create an appropriate governance framework bringing together pertinent agencies to cooperate and formulate credible responses to a systemwide crisis.

### Selected cross-cutting recommendations and benchmarks (from annexes and FSAP summaries)
- Operational and legal measures across member states and the euro area include:
  - Establish EDIS, with a backstop arrangement.
  - Introduce a financial stability exemption from (i) the 8 percent mandatory bail-in for accessing the SRF and public funds; (ii) the 5 percent cap on SRF funding; and (iii) the proposed stricter state aid burden-sharing rules.
  - Subject to a financial stability exemption, align state aid burden sharing requirements in liquidation with the BRRD/SRMR.
  - Ensure effective DIS financing of deposit transfers in both resolution and liquidation.
  - Operationalize in all EA countries lending facilities between DIS.
  - Pare back state aid oversight of SRB resolution decisions and the use of the SRF and DIS funding on a least-cost basis.
  - Adopt a system-wide crisis preparedness and management framework.
- National FSAP recommendations highlighted practices such as:
  - Commit publicly to a seven-day payout period for insured deposits (cited across multiple countries).
  - Allow DIS to finance deposit transfers in both resolution and insolvency and ensure timely access to back-up funding.
  - Strengthen legal and operational independence of deposit insurers and exclude active bankers from deposit insurer boards.
  - Arrange for backstop funding for national DIFs and clarify government lending authority to DIFs where needed.
  - Operationalize inter-agency forums for crisis management and include DIS in national financial safety net coordination arrangements.
- Legal and DGSD options cited:
  - Target level deadline beyond 2024 and the option for a target level below 0.8 percent are noted as national options under Art 10(2) and Art 10(6) respectively.
  - Use of deposit insurance funds to support alternative measures and to fund deposit book transfers in national liquidation proceedings are identified under Art 11(3) and Art 11(6).
  - Lending to other EU deposit insurers is identified under Art 12(1).

*Source: IMF Working Papers — The Role for Deposit Insurance Funds in Dealing with Failing Banks in the European Union (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022002-print-pdf.pdf_