Keywords: deposit insurance; CMDI; financial stability; banking law; EU law
Modern deposit insurance serves a critical role in the economy: to maintain trust in the banking system by guaranteeing that ordinary depositors will not lose their savings in the event of bank failure. Preventing “bank runs”, or mass withdrawals driven by panic, is closely linked to the imperative of financial stability.[1] Yet deposit insurance is a highly visible, consumer-facing element of banking law. In principle, this visibility creates space for new legislative developments.
The European Union has a partially harmonised deposit insurance regime, through Directive 2014/49/EU, which sets common minimum standards across Member States.[2] These include a coverage level of EUR 100,000 per depositor per bank (the UK has recently increased its coverage level to GBP 120,000),[3] a reduction in payout deadlines to 7 days,[4] and a funding target of 0,8% of covered deposits.[5] The biggest vulnerability of this regime is that it operates through national deposit guarantee schemes (DGS) without “risk-sharing” between countries, i.e., no EU-wide fund. This is a flaw in the design of the euro area, where risks spread quickly due a high degree of integration, but national authorities lack intervention powers transferred to the European Central Bank.[6] Without common funding, deposits remain vulnerable to local macroeconomic shocks.[7]
The European Deposit Insurance Scheme (EDIS) was imagined as a solution to this problem. In its initial attempt in 2015, the Commission proposed a centralised deposit insurance system within the Banking Union (a related project to centralise bank supervision and resolution).[8] EDIS was to be implemented in phases, beginning with the reinsurance of national schemes and progressing toward full coverage over a period of eight years. This legislative effort encountered significant political resistance and has since stalled.
What are the main challenges of EDIS?
There are several concerns around EDIS, broadly linked to the issue of risk-sharing. First, the absence of a common fiscal policy creates uneven sovereign debt exposures between countries. To explain: banks finance governments by purchasing their bonds (a type of debt instrument), and the risk associated with these bonds varies greatly according to public spending. Some Member States, particularly Germany and the Netherlands, fear they would bear the costs of bank failure in countries with poor budgetary discipline.[9] Second, this is exacerbated by the legacy risks of the global financial crisis. Banks in countries hit hardest by the crisis still carry volumes of non-performing loans (NPLs), assets which are unlikely to be recovered in full.[10] Accordingly, the debate is divided along geographical lines because there is a higher risk of bank failure in some Member States than in others.
Third, an important concern relates to the distinct banking cultures across Member States, which are rooted in competing ideologies. Germany, for example, has a long history of cooperative banking through its Volksbanken (people’s banks), which achieve mutualisation of risk through a network of customer-owned banks. Concentration of funding at the EU level may jeopardise a decentralised system built on local community values. Fourth, on the other side of the ideological spectrum, the debate often turns to the risk of moral hazard. Protection of bank deposits could encourage bank managers to take greater risks and reduce incentives for depositors to monitor them.[11] It follows that EDIS cuts across the ideological spectrum, in terms of both support and opposition.
What are the possible solutions?
Several proposals have been put forward on how to address the issue of risk-sharing. For example, Schoenmaker suggests restricting EDIS membership to banks which have reduced their portfolio of NPLs to a sustainable level.[12] Another proposal is for risk-based contributions, whereby the amount each participating bank adds to the funding pool varies according to its risk profile.[13] It seems clear that both ideas will feature in any future version of EDIS.
Ultimately, the solution is precisely that there are multiple possible versions of EDIS to address the above concerns. The most limited version provides ‘reinsurance’ of national deposit guarantee schemes, i.e., liquidity support should national schemes come under pressure, without directly insuring losses. A middle-ground proposal is a ‘hybrid’ EDIS taking on a percentage of the funding responsibility without replacing national DGS. Even a full insurance model, as envisaged in the original proposal, would be implemented gradually, beginning with reinsurance and progressing to hybrid models before reaching its final stage. Therefore, the design of EDIS is important, but it neither justifies the political impasse nor is likely to break it.
Can the CMDI effort generate political momentum?
In March 2026, the EU adopted its Crisis Management and Deposit Insurance (CMDI) framework, a package to update existing legislation on bank resolution and deposit insurance.[14] The CMDI framework provides a degree of uniformity across several “behind the scenes” elements of deposit insurance.[15] It seeks to make DGS more mobile, by enabling authorities to deploy these funds in preventive action and in the resolution of smaller banks—not only for depositor payouts. This is a step towards aligning decentralised funding of deposit insurance with centralised governance, at least in terms of more consistent policy outcomes. In that regard, CMDI represents the most significant progress since 2015.
One of the debates during the CMDI legislative process was whether covered deposits would retain their “super priority” over other claims in an insolvency. A strict creditor hierarchy may, in fact, impede efforts to save a bank before insolvency.[16] The final regime does not alter the status of ordinary deposits, but rather harmonises a subordinated category (e.g., deposits by central or state governments).[17] Thus, the CMDI package achieves ‘general depositor preference’, which broadly means that all depositors rank higher than other investors.[18] This is a small victory for consumers, who retain a sense of entitlement to their savings.
This is a good moment to reopen the debate on EDIS. The CMDI package is complex, but irrespective of its strengths and weaknesses, it offers a way to re-engage the consumer base and change the political narrative: EDIS would serve to reinforce the legal status of ‘general depositor preference’ with real economic backing.
[1] Douglas W Diamond and Philip H Dybvig, ‘Bank Runs, Deposit Insurance, and Liquidity’ (1983) 91(3) Journal of Political Economy 401.
[2] Directive 2014/49/EU of the European Parliament and of the Council of 16 April 2014 on deposit guarantee schemes [2014] OJ L173/149.
[3] Article 6(1).
[4] Article 8(1).
[5] Article 10(2).
[6] Including control over monetary policy and supervision of systemically important banks. The bank resolution (ex post) side is also centralised through other agencies.
[7] On the link between deposits and macro/fiscal risk, see Michael G Arghyrou, Maria-Dolores Gadea and Alexandros Kontonikas, ‘Private Bank Deposits and Macro/Fiscal Risk in the Euro Area’ (2024) 140 Journal of International Money and Finance 102992.
[8] European Commission, Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 806/2014 in order to establish a European Deposit Insurance Scheme COM/2015/586 final.
[9] See David Howarth and Lucia Quaglia, ‘The Difficult Construction of a European Deposit Insurance Scheme: a Step Too Far in Banking Union’ (2018) 21 Journal of Economic Policy Reform 190.
[10] European Commission, ‘Tackling non‑performing loans in the aftermath of the COVID‑19 pandemic’ COM/2020/822 final (16 Dec 2020).
[11] See generally Michael C Keeley, ‘Deposit Insurance, Risk, and Market Power in Banking’ (1990) 80 American Economic Review 1183.
[12] Dirk Schoenmaker, ‘Building a Stable European Deposit Insurance Scheme’ (2018) 4 Journal of Financial Regulation 314.
[13] See Agnès Bénassy-Quéré and others, ‘Reconciling Risk Sharing with Market Discipline: A Constructive Approach to Euro Area Reform’ (CEPR Policy Insight No 91, 2018).
[14] The legislative package includes various amendments. A good starting point is European Parliament, ‘New rules to address bank failures protecting taxpayers and depositors’ (Press release, 26 March 2026).
[15] Including the hierarchy of claims in insolvency, the use of DGS funds, the “least cost test”, public interest assessment, and other areas.
[16] Super priority means covered deposits are recovered first, making insolvency the least costly option for DGS.
[17] The new hierarchy has a big impact on the “insolvency counterfactual”, which is used to calculate if preventive or resolution action is cost-effective. The amendments address rigidity in other ways, such as explicitly authorising alterative measures.
[18] Article 108(1) of the amended BRRD.