By Marta Andreasen MEP
• The United Kingdom will have to loan money to countries that cannot protect their depositors under a new law proposed by Brussels. The European Commission has proposed two directives to update bank deposit protection.
One very interesting and to my mind quite sneaky part of the proposal is for a compulsory credit mechanism to protect the bank deposits in countries that could not afford to protect their depositors in the event of bank failure.
First a little history. There are currently 40 different Deposit Guarantee Schemes (DGS) across the EU. These cover different groups of depositors and deposits up to different levels. These DGSs have a very useful function. They support the confidence of depositors in the banking system and without them there would be a bank run if there was suspicion that a bank was insolvent, and because banking depends on trust the suspicion itself would create insolvency where it did not exist previously. These guarantee schemes might be many, fragmented and varied, but they have worked in the biggest crisis since 1929 and so far not one penny has been lost by any depositor in an EU bank (or for that matter in the USA where their own FDIC protects their deposits).
The Commission is not satisfied with the varied level of protection in Europe and as usual wants to harmonise by imposing its own system. It is aiming at increasing the protection to deposits of up to €100,000 from the present limit of €50,000. At present all countries must protect depositors up to €50,000 but many already protect amounts of €100,000 and higher. By imposing a blanket guarantee up to €100,000 paying out in 7 days across Europe the Commission recognises that some countries might not be able to pay out in the event of bank failure. So to make this work they have proposed a compulsory credit mechanism where if a country cannot pay then the other EU members will have to provide financial support.
One country has said no. At least the Finance Committee of the Swedish Parliament, the Riksdag, has just said no this month and the Swedish Parliament will vote on it later in the year. The committee said that compulsory loan scheme may encourage some countries to take risks knowing that the EU is the lender of last resort. In their press release they say that if the Commission wants to achieve financial stability perhaps the only way is if it is solely a national responsibility. The committee also believes that the proposals violate the principle of subsidiarity.
My Swedish friends point out that if Iceland had been a member of the EU and this scheme was up and running the Swedes, many of whom lost money in the Icelandic bankrupcy, would have had to lend to Iceland. The situation would have been similar in the UK. The British taxpayer would have had to loan money to protect British depositors who had lost money in Icelandic banks.
This directive has not been presented to the European Parliament yet, but when it is I intend to take an active part in opposing this compulsory loan scheme.