Principles of a Two-Tier European Deposit (Re-)Insurance System. CEPS Policy Brief No. 287, 17 April 2013.

There is general agreement that banking supervision and resolution have to be organised at the same level. It is often argued, however, that there is no need to tackle deposit insurance because it is too politically sensitive. This note proposes to apply the principles of subsidiarity and re-insurance to deposit insurance: Existing national deposit guarantee schemes (DGSs) would continue to operate much as before (with only minimal standards set by an EU directive), but they would be required to take out re-insurance against risks that would be too large to be covered by them. A European Reinsurance Fund (EReIF) would provide this reinsurance financed by premia paid by the national DGSs, just as any reinsurance company does in the private sector. The European Fund would pay out only in case of large losses. This ‘deductible’ would provide the national authorities with the proper incentives, but the reinsurance cover would stabilize depositor confidence even in the case of large shocks. Ideally the national DGSs would be responsible also for resolution. Experience has shown banking systems are more stable if deposit insurers are also responsible for resolution. The approach proposed here could thus be also used to design the ‘Single Resolution Mechanism’ (SRM) which is being discussed as a complement to the ‘Single Supervisory Mechanism’ (SSM). It will of course take time to build up the funding for such a reinsurance fund. This approach is thus not meant to deal with legacy problems from the current crisis.

Collateral and Credit Rationing. The role of collateral in explaining and remediating the limited flow of credit to households and SMEs. ECRI Policy Brief No. 7, February 2014

European-wide data concerning both companies and households indicate that the credit rationing phenomenon, which has been predicted by theory, does in fact occur to a significant degree in the European credit market. Among SMEs, micro companies are most vulnerable and the current economic crisis has only made these concerns more pressing. Top-down use of the monetary transmission mechanism alone is insufficient to counter the problem. The other solution consists of a bottom-up, microeconomic stimulation of lending transactions, by focusing on collateral and guarantees. The data confirm the high importance that lenders – especially individual households and micro companies – attach to collateral and guarantees when making their lending decisions. As a consequence, we would argue that those parts of the law governing security interests and guarantees should be one of the primary targets for government policy aimed at improving credit flows, especially in avoiding a conflict between consumer protection measures and laws on surety and guarantees. This policy brief firstly aims to give an overview of the problem of credit rationing and to show that low-income households and SMEs are most concerned by the phenomenon. Focusing solely on loans as a way of financing and on the issues related to access to finance by micro and small companies as well households, it then sketches possible solutions focused on guarantees. This paper brings together data from the Eurosystem Household Finance and Consumption survey (HFCS), Eurostat, and both the latest wave of the extended biennial EC/ECB Survey on the access to finance of SMEs (EC/ECB SAFE 2013) and the latest wave of the smaller semi-annual ECB SAFE Survey, covering the period between October 2012 and March 2013.

Strategic Insurance: The Future of the Belgian Armed Forces. IES Policy Brief Issue 2014/04/May 2014

Summary. Belgium is on the cusp of its next defence reform. While the security landscape throughout Europe’s neighbourhood and beyond deteriorates, the armed forces face numerous challenges. Most importantly, the next defence plan needs to recalibrate the force structure in function of political ambitions and budgetary realities. This Policy Brief argues that Belgium must embrace a nimble but broad-spectrum force. Any future structure must encompass agile land forces as well as a modern combat air force, without neglecting the need to safeguard a sizeable navy and invest in cyber capabilities. European cooperation should be pursued wherever possible while recognising that this necessitates budgetary convergence. For Belgium this means the investment budget needs to grow significantly in order to acquire interoperable but self-owned assets. Such a choice can be justified on the recognition that defence is not just about expeditionary operations, but also economic stimulus, intergenerational solidarity and strategic insurance: maintaining the ability to respond to whatever the future may bring.

Completing the Banking Union: Deposit Insurance. CEPS Policy Brief No. 335, 3 December 2015

It is generally agreed that a Banking Union should have common or ‘single’ institutions responsible for carrying out three basic functions: supervision, resolution and deposit insurance. So far, however, agreement has been reached in the EU on only the first two of these functions. The Commission has now presented its proposal on how to complete the Banking Union with a European Deposit Insurance Scheme (EDIS). It is an innovative and courageous proposal. It is courageous because it will clearly be very controversial in a number of member states (especially Germany) and it is innovative because it proposes a three-stage process, starting with re-insurance, then switching to co-insurance and finally to full direct insurance of deposits via a ‘single’ Deposit Insurance Fund (DIF). This final stage should be reached in 2024, which is also the date at which the Single Resolution Fund (SRF) will become the only source of financing for bank resolution. The Commission’s proposal calls for integrating the decision-making for EDIS into the decision-making entity for the SRF, namely the existing Single Resolution Board (SRB). This makes sense if one views resolution and deposit insurance as two highly interlinked dimensions of dealing with banks in trouble. In this view the two dimensions should be bundled into one institution – and one suspects that over time the two funds (the SRF and the DIF) could be merged into one. This Policy Brief argues that re-insurance should not be considered as a transitory phase, but could also provide a solution for the long run. ‘Experience rating’ could be used to ensure a proper pricing of risk and to protect the interests of the depositors in countries with safer banking systems. Moreover, EDIS should have a decision-making structure separate from and independent of the SRM, since it has mainly a macroeconomic function.

The challenges of Europe's fourfold union. Bruegel Policy Contribution 2012/13, 16 August 2012

Five years after the first tremors in Europe’s banking system, what makes the crisis unique is the absence of a democratically accountable decision-making framework; there is an 'executive deficit' that compounds Europe’s democratic deficit. The author argues that the only way to resolve the crisis successfully is a sustained effort to achieve a 'fourfold union' agenda: banking union, fiscal union, competitiveness union and political union. Progress must be made in parallel on each of the four components. In particular, successful progress towards banking union requires a combination of short term action, including the establishment of a temporary resolution authority to identify undercapitalised banks and to restructure them, and longer-term measures, including the creation of permanent authorities for supervision, resolution and deposit insurance.

The finance-welfare state nexus. ACES Cases No. 2013.1

At the height of the financial crisis, the Western welfare state prevented a repeat of the Great Depression. But there were also suggestions that social policy had contributed to the crisis, particularly by promoting households’ access to credit in pursuit of welfare goals. Others claim that it was the withdrawal of state welfare that led to the disaster. Against this background that motivated our interest, we propose a systematic way of assessing the relationship between financial market and public welfare provisions. We use structural vector auto-regression to establish the causal link and its direction. Two hypotheses about this relationship can be inferred from the literature. First, the notion that welfare states ‘decommodify’ livelihoods or that there is an equity-efficiency tradeoff would suggest that welfare states substitute to varying degrees for financial market offers of insurance and savings. By contrast, welfare states may support private interests selectively and/or help markets for households to function better; thus the nexus would be one of complementarity. Our empirical strategy is to spell out the causal mechanisms that can account for a substitutive or complementary relationship and then to see whether advanced econometric techniques find evidence for the existence of either of these mechanisms in six OECD countries. We find complementarity between public welfare (spending and tax subsidies) and life insurance markets for four out of our six countries, notably even for the United States. Substitution between welfare and finance is the more plausible interpretation for France and the Netherlands, which is surprising. Data availability constrains us from testing the implications for the welfare state contribution to the crisis directly but our findings suggest that the welfare state cannot generally be blamed for the financial crisis.

Firmer foundations for a stronger European Banking Union. Bruegel Working Paper 2015/13, November 2015

The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking.The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries.While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out.To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.

A European Deposit Insurance and Resolution Fund - An Update. CEPS Policy Brief No. 283, 11 September 2012

Cross-border banking is currently not stable in Europe. Cross-border banks need a European safety net. Moreover, a truly integrated European level banking system may help to break the diabolical loop between the solvency of the domestic banking system and the fiscal standing of the national sovereign. This policy paper first sketches the building blocks of a banking union. Importantly, a new European Deposit Insurance and Resolution Authority (EDIRA) should start simultaneously with the ECB assuming supervisory powers. A combination of European supervision and local resolution cannot work because it is not ‘incentive compatible’. Next, this paper proposes a transition period to gradually phase in the European deposit insurance coverage. Finally, we calculate that a European Deposit Insurance Fund would amount to about €30-50 billion for the 75 euro area banks that were subject to the EBA stress tests. This Fund could be created over a period of time through risk-based deposit insurance premiums levied on these banks. Once up and running, the Fund would then turn into a European Deposit Insurance and Resolution Fund to also deal with the resolution of one or more of these European banks.