Banking Union Completion Debates — The Deposit Insurance Pillar (EDIS)

1. Introduction

The European Banking Union was created after the euro-area sovereign-debt and banking crises exposed a major weakness in European integration: banks operated across an increasingly integrated European financial market, but responsibility for rescuing banks and protecting depositors remained heavily national.

The Banking Union is generally described through three interconnected pillars:

Pillar 1 — Single Supervisory Mechanism (SSM)
Centralised prudential supervision led by the European Central Bank (ECB).

Pillar 2 — Single Resolution Mechanism (SRM)
A common framework for dealing with failing banks, centred on the Single Resolution Board (SRB) and the Single Resolution Fund.

Pillar 3 — European Deposit Insurance Scheme (EDIS)
A proposed common European system for protecting covered bank deposits.

The first two pillars are operational. The third remains the central unfinished element of Banking Union.

This is why discussions about “completing the Banking Union” frequently focus on EDIS.

2. What is deposit insurance?

Deposit insurance protects eligible depositors if their bank fails and can no longer repay their deposits.

Under the EU framework established principally by Directive 2014/49/EU on Deposit Guarantee Schemes (DGSD), covered deposits are generally protected up to:

€100,000 per depositor per bank.

Suppose a depositor has:

€72,000 in Bank A.

If Bank A fails and the statutory conditions for payout arise, the depositor's covered amount is generally protected.

If the depositor has €140,000, the ordinary guarantee generally covers €100,000, while the remaining amount does not receive the ordinary guarantee, subject to special rules such as protection applicable to certain temporary high balances.

3. The current problem: deposit insurance remains largely national

Banking supervision has been substantially Europeanised.

Bank resolution has also been substantially Europeanised.

Deposit protection, however, continues to depend primarily on national Deposit Guarantee Schemes (DGSs).

Spain therefore has its own institutional deposit-guarantee arrangements, principally the:

Fondo de Garantía de Depósitos de Entidades de Crédito (FGD).

This creates an important structural question.

A bank can be:

supervised at European level → resolved through European institutions → but deposits remain principally backed through a nationally organised guarantee scheme.

Supporters of EDIS argue that this institutional asymmetry leaves Banking Union incomplete.

4. What is EDIS?

The European Deposit Insurance Scheme (EDIS) is the proposed European-level deposit-insurance component of Banking Union.

The European Commission originally proposed EDIS in 2015 through amendments to the SRM framework.

The basic policy objective was to progressively reduce the dependence of depositor protection on the fiscal and financial strength of individual Member States.

The conceptual model is:

National DGS risk

becoming increasingly

European pooled risk.

The underlying principle is similar to the other Banking Union reforms: if banking activity and banking supervision operate across borders, the financial safety net should also become more European.

5. Why was EDIS proposed?

The proposal addresses the so-called bank–sovereign nexus or doom loop.

Imagine that banks in Member State A experience a severe financial crisis.

Bank losses increase.

The national financial safety net comes under pressure.

Investors then worry about whether the national government can support the financial sector.

Government borrowing costs rise.

Banks themselves hold substantial amounts of domestic sovereign debt.

The deterioration of sovereign creditworthiness therefore further weakens banks.

The cycle becomes:

weak banks → pressure on sovereign → weaker sovereign → further pressure on banks.

A genuinely European deposit-insurance mechanism could weaken this relationship by making depositor protection less dependent on the resources of the country in which a bank happens to be established.

6. Depositor confidence and bank runs

Deposit insurance is fundamentally about confidence.

If depositors believe that their money is protected, they have less reason to withdraw deposits simply because rumours emerge about their bank.

Without credible protection:

fear → withdrawals → liquidity pressure → more withdrawals → possible bank failure.

A common European scheme could potentially increase confidence that a €100,000 covered deposit receives comparable protection irrespective of whether the bank is established in Spain, Germany, Italy, Portugal or another participating Banking Union state.

7. The financial-integration argument

Banking Union seeks to create a genuinely integrated European banking market.

However, national deposit insurance can contribute to fragmentation.

During financial stress, depositors might believe that:

“A deposit in a bank backed by a financially stronger Member State is safer than the same deposit in a bank located in a fiscally weaker Member State.”

Even where legal coverage is nominally identical, perceptions concerning the ultimate strength of national financial backstops can differ.

EDIS is intended to reduce this perception.

Thus:

same European supervision + same resolution framework + common deposit protection

would produce a more internally coherent Banking Union.

8. The major political disagreement: risk sharing versus risk reduction

The EDIS debate is frequently described as a conflict between:

Risk sharing

Supporters argue that financial stability requires Member States to share banking risks.

A crisis affecting banks in one Member State should not overwhelm that country's national deposit scheme.

Risk reduction

Opponents or more cautious Member States argue that banking risks must first be sufficiently reduced before they are mutualised.

The concern is essentially:

Why should depositors or banks in one country indirectly bear losses generated by historical banking weaknesses or policy choices in another country?

This produces the famous Banking Union debate:

Should Europe share risks first and thereby strengthen stability, or reduce national risks first and share them afterward?

In practice, current policy debates generally seek some combination of both.

9. Legacy non-performing loans

One historical objection concerned high levels of non-performing loans (NPLs) in certain national banking systems.

Suppose:

Banking system A has historically accumulated significant problematic loans.

Banking system B has comparatively clean balance sheets.

If a common deposit-insurance fund is immediately created, banks in B may fear that their contributions will be used disproportionately to cover failures originating from legacy problems in A.

This became one of the arguments for substantial risk reduction before full mutualisation.

European reforms addressing NPLs, capital, supervision and resolution have therefore been closely connected politically to the EDIS debate.

10. Sovereign exposures

Another major unresolved issue concerns banks' holdings of government debt.

European banks frequently hold substantial amounts of sovereign bonds, particularly those issued by their home states.

Critics of immediate EDIS mutualisation argue that it is problematic to pool deposit-insurance risks while banking systems retain materially different sovereign exposures.

The debate therefore becomes:

Should sovereign-risk concentration be addressed before deposit insurance is mutualised?

This is politically sensitive because government bonds play an important role in bank liquidity, collateral and financial markets.

11. Moral hazard

Another objection is moral hazard.

If losses are collectively insured, an institution might theoretically have weaker incentives to avoid excessive risk.

For example:

Bank A follows conservative lending practices.

Bank B follows aggressive lending practices.

If both ultimately receive equivalent European deposit protection, critics fear that Bank B's risks could partially be transferred to the collective system.

EDIS proponents answer that this problem can be addressed through:

• risk-based contributions;
• ECB supervision;
• capital and liquidity requirements;
• resolution rules;
• MREL requirements;
• supervisory intervention;
• carefully designed eligibility conditions.

The issue is therefore not necessarily whether risk sharing creates moral hazard, but whether institutional safeguards can sufficiently control it.

12. Risk-based bank contributions

A common European deposit-insurance scheme does not necessarily mean that every bank would pay the same amount.

A risk-based system can require riskier institutions to contribute more.

Conceptually:

higher bank risk → higher contribution

and

lower bank risk → lower contribution.

This is intended to align incentives and reduce cross-subsidisation between prudent and riskier banks.

13. EDIS and the Single Resolution Mechanism

Deposit insurance and bank resolution are closely connected.

When a bank fails, authorities need to determine whether it should:

enter resolution

or

leave the market through normal national insolvency/liquidation procedures.

This distinction matters because different funding arrangements and creditor-treatment rules can apply.

A DGS can also have a role beyond simply paying depositors after liquidation, depending on the applicable legal framework.

Consequently, discussions concerning EDIS have increasingly become connected to the EU's broader Crisis Management and Deposit Insurance (CMDI) reforms.

14. Bail-in and depositor protection

The Bank Recovery and Resolution Directive (BRRD) established a European framework under which shareholders and creditors can absorb bank losses.

This is known as bail-in.

The general logic is:

shareholders → subordinated creditors → other eligible liabilities according to statutory hierarchy

rather than immediately transferring bank losses to taxpayers.

Covered deposits enjoy particularly strong protection.

Deposits covered by the DGS are excluded from ordinary bail-in treatment within the applicable framework.

This distinction is fundamental.

Deposit insurance protects covered depositors.

Bail-in allocates losses in bank resolution.

They are different mechanisms but form parts of the same financial safety architecture.

15. Spain and EDIS

Spain has a particularly important interest in Banking Union because the euro-area crisis demonstrated how banking problems can interact with sovereign finances.

Spanish banking-sector restructuring became an important part of the broader development of Banking Union.

For Spain, a complete European deposit-insurance mechanism could potentially:

reduce national financial fragmentation;

strengthen depositor confidence;

facilitate cross-border banking;

reduce the bank–sovereign nexus;

and make the protection of Spanish depositors less dependent on purely national resources during an extreme systemic crisis.

However, Spain would also participate in the mutualisation of risks arising elsewhere in the Banking Union.

That is precisely why EDIS requires careful rules concerning contributions, loss allocation and risk controls.

16. Case law

There is not yet a large body of judgments specifically interpreting a fully operational EDIS because full EDIS has not been implemented.

The relevant jurisprudence therefore comes primarily from cases concerning deposit guarantees, bank resolution, Banking Union institutions, burden sharing and depositor rights.

These cases are highly useful for understanding the legal environment in which EDIS would operate.

Case 1 — Paul and Others v Germany

CJEU, Case C-222/02 (2004)

This important pre-Banking Union case concerned depositors who suffered losses following the failure of a German bank.

The applicants argued, among other matters, about the state's responsibility in connection with banking supervision and EU deposit-guarantee requirements.

The Court did not establish a general EU-law right for depositors to obtain compensation from the state merely because banking supervision had allegedly been inadequate.

Importance

The case demonstrates the distinction between:

prudential supervision

and

deposit protection.

The Banking Union subsequently Europeanised supervision through the SSM, but deposit insurance remained principally national.

That institutional separation is precisely what EDIS seeks partially to overcome.

17. Case 2 — Kotroni and Others v Greece

CJEU, Case C-177/22

This litigation addressed important questions concerning the scope of EU deposit-guarantee protection and the treatment of depositors in circumstances involving financial instruments and deposits.

Importance

The judgment illustrates a fundamental principle for EDIS:

Before asking who pays, the legal system must determine what constitutes an eligible or covered deposit and who qualifies for protection.

A European deposit-insurance mechanism therefore requires sufficiently harmonised definitions across Member States.

18. Case 3 — Kantarev

CJEU, Case C-571/16 (2018)

This case arose from the failure of Corporate Commercial Bank in Bulgaria.

The dispute concerned delayed recognition that deposits had become unavailable and the resulting delay in compensation.

The CJEU considered the obligations created by EU deposit-guarantee law and state liability.

Importance

Kantarev demonstrates that deposit insurance is not merely a political promise.

EU legislation creates legally enforceable obligations concerning the activation and functioning of deposit protection.

For EDIS, this highlights the importance of:

rapid determination → rapid access to guaranteed funds → uniform protection.

A common European system would therefore need not only sufficient funding but effective administrative machinery.

19. Case 4 — Anisimovienė and Others

CJEU, Case C-688/15 (2018)

This case involved questions concerning the relationship between deposits and investment-related claims under EU protection schemes.

The Court considered the interaction between the Deposit Guarantee Schemes framework and investor-compensation rules.

Importance

A future European deposit-insurance architecture needs precise boundaries.

Not every financial claim against a bank is a deposit.

Therefore:

deposit protection ≠ investment protection.

The classification of the financial product can determine which protection system applies.

20. Case 5 — Tadej Kotnik and Others v Državni zbor Republike Slovenije

CJEU, Case C-526/14 (2016)

Kotnik concerned state aid and burden-sharing measures adopted in connection with bank recapitalisation.

The Court examined EU rules requiring shareholders and subordinated creditors to contribute to losses before public resources were used.

Importance for EDIS

The case reflects a central philosophy behind post-crisis European banking law:

private investors should generally absorb bank losses before taxpayers.

EDIS must coexist with this principle.

A deposit-insurance scheme should protect covered depositors rather than become a mechanism for automatically rescuing shareholders and investors.

21. Case 6 — Ledra Advertising Ltd and Others v European Commission and ECB

Joined Cases C-8/15 P to C-10/15 P (2016)

The case arose from the Cyprus banking crisis and losses imposed in connection with restructuring measures.

The Court considered the responsibilities of EU institutions and fundamental-rights issues.

Importance

The Cyprus crisis demonstrated dramatically how confidence in deposits can become central to financial stability.

It strengthened the broader policy argument that credible and predictable depositor protection is an essential component of monetary and banking integration.

22. Case 7 — Dowling and Others

CJEU, Case C-41/15 (2016)

The case arose from measures connected with the restructuring of an Irish bank during the financial crisis.

The Court addressed interactions between company-law protections and emergency banking measures required in the context of financial stability.

Importance

The judgment illustrates how bank crises can require exceptional intervention and how national corporate-law rules interact with European financial-stability objectives.

A functioning EDIS could potentially reduce some of the destabilising pressure associated with fears over depositor losses.

23. Case 8 — Landeskreditbank Baden-Württemberg v ECB

CJEU, Case C-450/17 P (2019)

The dispute concerned whether a German bank should be classified as a "significant" institution for purposes of direct ECB supervision.

The CJEU confirmed the extensive supervisory architecture established by the SSM framework.

Why relevant to EDIS

The case illustrates how far Banking Union has already progressed regarding centralised supervision.

There is therefore an institutional contrast:

supervision → strongly Europeanised

resolution → strongly Europeanised

deposit insurance → substantially national.

This asymmetry provides one of the strongest structural arguments for EDIS.

24. Case 9 — Banca Popolare di Bari

EU litigation surrounding bank-support measures has also highlighted the difficult boundary between deposit-guarantee interventions and state aid.

This issue matters because national DGSs may sometimes do more than simply reimburse depositors.

They can potentially participate in preventive or alternative interventions, depending upon national and EU law.

If public authorities exercise sufficient control over the resources involved, questions may arise under:

Articles 107–108 TFEU — EU State Aid Law.

This becomes important in designing any future European deposit-insurance architecture.

25. Case 10 — Tercas

Italy and Others v Commission, Joined Cases C-425/19 P and others

The litigation concerned an intervention by the Italian Deposit Guarantee Fund supporting Banca Tercas.

The central issue was whether the intervention constituted state aid attributable to Italy.

The EU courts rejected the Commission's approach to attribution in the circumstances.

Importance

Tercas is exceptionally important for deposit-insurance policy.

It demonstrates that the legal characterization of DGS resources matters.

A deposit-guarantee scheme can have industry-funded resources without those resources automatically becoming state resources merely because the scheme operates within a statutory framework.

For EDIS, questions of:

fund ownership, institutional control, decision-making authority and public attribution

will therefore be legally significant.

26. The CMDI connection

The modern EDIS debate cannot be separated from reform of the Crisis Management and Deposit Insurance framework.

A longstanding difficulty is that many small and medium-sized failing banks may not satisfy the conditions for European resolution.

They therefore enter national insolvency proceedings.

This can generate divergent outcomes across Member States.

Reforms seek greater consistency regarding:

resolution versus liquidation;

use of DGS resources;

creditor hierarchy;

depositor protection;

and

handling of smaller banks.

Improving CMDI can therefore be viewed as an important step toward a more complete Banking Union.

27. Arguments in favour of EDIS

Supporters advance several interconnected arguments.

First, equal deposits should receive equally credible protection throughout Banking Union.

Second, EDIS could weaken the sovereign-bank doom loop.

Third, common insurance could reduce financial fragmentation during crises.

Fourth, it could make cross-border bank consolidation easier because deposit protection would become less nationally segmented.

Fifth, it would complement European supervision and resolution.

Finally, pooling risks across a much larger banking system can increase diversification.

A banking crisis concentrated in one Member State would not necessarily have to be absorbed primarily by that country's banking sector.

28. Arguments against immediate full EDIS

Opponents of rapid mutualisation raise legitimate concerns.

Moral hazard

Common insurance might weaken national incentives to control banking risks.

Legacy banking risks

Existing bad loans and structural weaknesses could effectively be transferred to the collective system.

Sovereign concentration

Banks remain closely connected with their national governments through sovereign-debt holdings.

Different insolvency systems

Bank insolvency law is still not completely harmonised.

Political accountability

European taxpayers and banking sectors may resist responsibility for failures originating in other countries.

Fiscal implications

A sufficiently severe systemic crisis could raise questions about whether industry-funded resources would ultimately require some form of public backstop.

These concerns explain why negotiations have been prolonged.

29. Possible compromise: hybrid EDIS

One possible route is a gradual or hybrid system rather than immediate complete mutualisation.

For example:

Stage 1

National DGS remains primarily responsible.

↓

Stage 2

European resources provide liquidity assistance when national resources become temporarily insufficient.

↓

Stage 3

Losses are progressively shared according to agreed rules.

↓

Stage 4

A more fully mutualised European deposit-insurance system emerges.

Such structures seek to balance solidarity with national responsibility.

30. Spain-specific implications

For Spanish banking law, completion of the deposit-insurance pillar could produce several important consequences.

The Spanish FGD could become increasingly integrated into a European funding structure.

Large Spanish banking groups operating across Europe could benefit from reduced national fragmentation.

Depositor confidence might become less dependent on perceptions about Spanish sovereign finances.

Cross-border acquisitions could become easier because national DGS barriers would matter less.

At the same time, Spanish banks could contribute resources that ultimately support deposit protection elsewhere in Banking Union.

Consequently, Spain has both risk-sharing benefits and mutualisation costs to consider.

31. Constitutional dimension

EDIS also raises deeper questions about European integration.

Monetary policy for euro-area states is already centralised.

Major-bank supervision is centralised.

Bank resolution has substantially moved to European institutions.

But financial loss-sharing remains politically sensitive because it involves redistribution.

EDIS therefore sits at the boundary between:

financial regulation

and

European fiscal solidarity.

This explains why creating the third pillar has proven substantially more politically difficult than simply harmonising technical banking regulations.

32. Practical crisis example

Assume a major Spanish bank suffers catastrophic losses.

It has:

€80 billion of covered deposits.

The bank is declared failing or likely to fail.

Under the Banking Union framework, authorities first determine whether resolution is justified in the public interest.

If resolution occurs:

shareholders absorb losses → eligible creditors may be bailed in → covered deposits remain protected.

If liquidation instead occurs, the relevant deposit-guarantee framework protects eligible covered depositors.

Under today's structure, the Spanish DGS remains centrally relevant.

Under a mature EDIS structure, the protection would increasingly involve a European pooled mechanism.

That is the practical difference between today's incomplete Banking Union and the proposed third pillar.

33. Overall legal significance of the case law

The cases establish several principles relevant to any future EDIS:

Paul — supervision and depositor compensation are legally distinct.

Kantarev — deposit-guarantee obligations must operate effectively and promptly.

Anisimovienė — deposits and investment claims require clear classification.

Kotnik — shareholders and investors can be required to absorb losses before public support.

Ledra Advertising — banking-crisis measures remain subject to EU legal and fundamental-rights constraints.

Landeskreditbank — European banking supervision is genuinely centralised.

Tercas — the legal character and governmental control of DGS resources matter for EU state-aid law.

Together, these cases show why EDIS is much more than simply creating a European reimbursement fund.

Conclusion

The deposit-insurance pillar is arguably the most significant unfinished component of the European Banking Union.

The existing architecture can be summarised as:

ECB/SSM supervision
↓
SRB/SRM resolution
↓
national deposit-guarantee schemes.

EDIS seeks ultimately to move toward:

European supervision
↓
European resolution
↓
European deposit protection.

Its strongest justification is that a genuinely integrated monetary and banking system should not allow the perceived safety of a covered deposit to depend heavily on the fiscal strength of the depositor's home Member State.

Its greatest obstacle is equally clear: deposit insurance means sharing financial losses. Member States therefore disagree about how much banking risk must first be reduced before those risks can be mutualised.

For Spain, EDIS could strengthen depositor confidence, weaken the sovereign-bank nexus and deepen cross-border financial integration. But Spain would simultaneously assume part of the collective responsibility for banking failures elsewhere.

The central Banking Union debate can therefore be reduced to one question:

Can Europe maintain genuinely European banking supervision and resolution while leaving the final depositor-protection safety net predominantly national?

The continuing EDIS debate suggests that, institutionally, the Banking Union remains incomplete until Europe finds a politically and legally acceptable answer.