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eu proposed revisions to depositor protection October 16, 2008

Posted by Bradley in : Uncategorized , trackback

The Commission has published proposals to revise the deposit guarantee schemes directive, which are designed to implement the Council’s recent decisions. The document notes that normal processes have been distorted in current emergency conditions:

Due to the urgency of the matter, neither an impact assessment nor a public consultation could be carried out for the current proposal.

Immediately after recognizing this failure to follow normal processes, the Commission points out in the proposal that it has been thinking about deposit guarantee schemes for the last couple of years or so. But that thinking isn’t very relevant, as it seemed to lead in a direction different from the one in which we are now travelling.

In late 2006 the Commission published a Communication which addressed the issue of coinsurance in this way:

At this stage, there would appear to be insufficient support to introduce any short-term change to co-insurance rules. In general, there seems to be no agreement among stakeholders about whether the underlying principle of moral hazard, (i.e. the risk that, because their deposits are insured in any case, depositors choose a bank without first assessing its soundness) justifies its application. Some consider co-insurance an indispensable element in preventing moral hazard, while others, in particular consumer associations, argue that depositors should not be placed in a position whereby they are expected to judge the soundness of the credit institution.
In the light of these dissenting views, the Commission is not convinced that at this stage a change to the co-insurance rules would be justified.

The new proposal addresses the coinsurance issue as follows:

This has proven counterproductive for the confidence of depositors and may have exacerbated the problems. The argument of moral hazard (depositors should be ‘punished’ if they deposit their funds at a bank offering high interest rates but incurring high risks) is not tenable since retail depositors cannot, in general, judge the financial soundness of their bank. Consequently, this option should be discontinued.

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