The European Banking Authority opposes increasing EU deposit coverage
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The European Banking Authority (EBA) recently published a report in which it analyzed the consequences of potential changes to the current deposit coverage level in the EU. As part of the report, the EBA expressed its disagreement with plans to increase it.
Right now, the deposit coverage level in the European Union is set at 100,000 EUR. It covers 96% of depositors in the European Economic Area (EEA), making sure that the depositors will be fully reimbursed in case of bank failure.
Meanwhile, 4% of the depositors — mostly companies — hold more than half of all deposits in the EEA. The distribution has pointed out a major concentration of deposit value among a very small fraction of the depositors.
Despite this, the EBA is against increasing the deposit coverage, as it explained in its report, which came in response to a request from the European Commission. The bank pointed out issues such as limited impact, cost, and moral hazard.
Increasing deposit coverage would not meaningfully affect depositors
The analysis also indicated that the proportion of fully covered depositors has been relatively stable ever since 2010, when the European Commission first made its assessment. The stability comes from the fact that the 100,000 EUR coverage level is still higher than the balance of an average depositor, even after inflation.
The EBA claims that it had conducted its own simulations in order to make an assessment of the effects that the potential increase in deposit coverage might have. The assessment handled cases of deposit coverage being increased to 150,000 EUR, 250,000 EUR, and even 1 million EUR coverage for companies.
During the assessment, it found that such increases would not affect the majority of the depositors in any meaningful way, given that the current 100,000 EUR threshold already covers them quite well. Furthermore, the report considered the potential extension of coverage to include public authorities’ deposits. This would also have a limited industry impact, as EBA found, due to a fairly small number of public authorities, compared to the total number of depositors in the European Union.
EBA explains why increasing the coverage threshold is a bad decision
After conducting a thorough analysis, the EBA has concluded that there is no need to alter the current deposit coverage level. Not only would it have a limited impact on financial stability and consumer protection, but it would also be quite costly due to a variety of factors, including the need for banks to contribute more money to deposit guarantee schemes and regulatory adjustments.
The EBA also highlighted moral hazard concerns, which refer to the risk that more extensive insurance coverage might lead to riskier behavior among both depositors and banks.
The bank still acknowledged that the coverage level is a crucial component in crisis management and deposit insurance framework — this is not being questioned. However, it is only one of numerous elements that must be considered before taking action.
