European Deposit Insurance. Is the Banking Union part of the short-term crisis management or part of the long-term institutional structure of the Euro Area – or both? On this, views differ, and the dividing line is mainly with regard to the role of deposit insurance. For those who see the Banking Union as part of crisis management, common deposit insurance should come early on. Proponents of this view see the Banking Union as a device to introduce elements of joint liability and risk sharing soon, thereby providing relief to the fiscal situation of the crisis countries (IMF, 2013a). Those who see the Banking Union mainly as part of a long-term institutional framework argue that, before a common deposit insurance scheme is being introduced, legacy assets need to be dealt with under national responsibility. During the transition stage, countries could take resort to the ESM for bank recapitalization, but the government would remain liable for these funds (German Council of Economic Experts, 2012b). To understand the role of the deposit insurance system in the context of the Banking Union, it is useful to recall the two main functions of such an insurance system. First, deposit insurance systems should prevent runs of depositors, thus protecting the payment systems and providing for efficient allocation of financial resources. Second, deposit insurance systems pay off depositors in case of actual bank insolvencies. Hence, the main role of a deposit insurance system is to insure depositors against liquidity, not against insolvency risk. But, of course, deposit insurers also play a role in the case of bank insolvencies. In the US, for instance, the deposit insurer FDIC secures customer deposits with US financial institutions; cooperative banks have a separate deposit insurance scheme. In the event of a crisis, should the fund volume not suffice, the FDIC can draw on a US Treasury Department credit line of up to USD 100 billion and in exceptional cases of as much as USD 500 billion. These loans are covered, later on, through a surcharge on deposit insurance premia. This shows the importance of a fiscal backstop for the restructuring and resolution of banks. It does not necessarily show the importance of having a unified deposit insurance system in Europe. Rather, national deposit insurance systems could coordinate this function during a resolution case. In any case, deposit insurance systems involve a trade off. On the one hand, liquidity risks are insured. On the other hand, any insurance...
