Europe's Got 99 Problems And A Deposit Guarantee Scheme Is One

Tyler Durden's picture

We have explained in the recent past just why the rotation from a professional European bond-run to a retail bank-run is critical to the euro-zone banking system - with deposit losses creating even more encumbered asset levels among European banks, which would then exaggerate contagion problems as funding pressures mount. The problem is existing deposit guarantee schemes are implemented at the national level and are not currently funded to handle a systemic crisis - this is why there has been so much chatter of a pan-Europe guarantee scheme. However, not only does a euro-wide guarantee rely on credible commitments from core European governments but it misses the redenomination risk - as unlike the US FDIC, it would need to explicitly guarantee the euro-value of deposits. Barclays shares our doubts on the implementation (short- and long-term) of such a solution, noting that Eurozone deposits are greater than eurozone GDP (as opposed to US deposits at ~68% of US GDP). Between operational difficulties, the size of redenomination losses, moral hazard, and the massive (deposit/GDP) contingent liability dependent on actual exit of a member state, we would urge any exuberance over 'talk' of a guarantee to be stymied once again by the dismal reality of implementation and agreement.

Via Barclays,

With increasing concerns about deposit flight following a potential Greek exit, investors have turned their attention to deposit guarantee schemes in the eurozone.

Current Eurozone Deposit Guarantees

One concern that has recently surfaced is the risk of deposit flight in peripheral Europe following a potential Greek exit from the eurozone

  • Redenominated Greek deposits would undergo significant depreciation, imposing massive losses on household savings
  • Depositors in other countries at risk of leaving the eurozone would likely respond by moving deposits to accounts in core Europe

The resulting funding pressure on peripheral European banks facing deposit outflows could become an additional source of contagion.

This problem is exacerbated by weaknesses in the current system of eurozone deposit guarantees

  • Insurance is implemented at a national level
  • Deposit insurance funds are not currently funded to handle a systemic crisis


One possible solution to address the current shortcomings of the existing guarantee schemes is to implement a new euro-wide fund that is jointly backed by the eurozone nations

Possible Solution: Euro-wide Guarantee

  • The current deposit guarantee system consists of national schemes funded independently by national banking systems, and may or may not include government guarantees
  • However, in a crisis, the banking system and government may not be able to make depositors whole
  • A new deposit guarantee scheme jointly backed by the eurozone nations would solve this problem
  • The strength of the guarantee and the strength of the guarantors are key. The new system would need a credible commitment from core European governments

But, What About Redenomination Risk?

  • To prevent deposit flight from fear of redenomination, the deposit insurance scheme would need to explicitly guarantee the euro-value of deposits
  • This type of scheme could solve both the guarantor credit-quality problem and the redenomination risk problem of the current system


But while such a fund could, in theory, help prevent deposit flight, there are several key practical issues with implementing the fund

Problems with a Euro-value Guarantee

While a euro-value guarantee scheme could prevent deposit flight following a potential Greek exit from the eurozone, we see several problems with implementing this solution

1. Operational difficulties

  • What currency are claimants paid in?
  • If they are paid in the new currency, how is the loss rate established?
  • How would capital controls impact settlement?

2. Size of the potential redenomination loss

  • The redenomination loss would be greater than typical losses in FDIC insured bank failures
  • Potential losses are large enough to call the credibility of the guarantee into question

3. Moral hazard problems

  • This type of guarantee scheme would make it less painful for peripheral European nations to leave the eurozone
  • Under a euro-value guarantee, a country could exit, massively reducing sovereign liabilities, while maintaining a substantial amount of household savings value

4. Finally, a euro-value guarantee scheme would be a massive contingent liability for guarantors that only pays out after a member exit --not an ideal setup

But apart from all that - it's a great idea... come on!!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
battle axe's picture

Sure your money is safe. sarc/

Dr. Engali's picture

        <-------Increasingly running a daily mental inventory of food , arsenal, and precious metals.

       <------Trusting that PTB will get everything back under control, and everything will be okay.

Vincent Vega's picture

"Reality" has never stopped these cocksucker's before.

q99x2's picture

FDA is cracking down on raising cocks.

battle axe's picture

Seems that some one is hitting the Down arrows today for the heck of it. Lets test it: "I love puppies" 

bigdumbnugly's picture

99 problems with europe on the wall

99 problems to fear

you take one down and pass it around

100 problems with europe on the wall.


100 problems with europe...... (refrain)

Cognitive Dissonance's picture

You're going in the wrong directi.......

Wait. We're in flush mode.....right?

Carry on. :)

bigdumbnugly's picture

yeah.   the original annoying song at least has an ending eventually.   this one goes to infinity

bigdumbnugly's picture


must be some european prohibitionists in the audience.

q99x2's picture

CIA they get paid by the click.

Manthong's picture


You and I in a little toy shop
Buy a bag of balloons with the money we've got
Set them free at the break of dawn
Til one by one, they were gone

yabyum's picture

Makes you want to put your money in a bank. That <1% intrest is so seductive.

CrashisOptimistic's picture

That interest rate screams out what is now obvious.


With oil flow pinching relentlessly, it is astonishing to me that anyone could expect anything other than deflation.

All time record lows on the 10 year bond.  As clear a DEFLATION signal as there can be.  

As for QE . . . why?  With rates at 1.66%, there is no point in driving them lower.  They'll go lower by themselves.

Matt's picture

If it wasn't for the money printing, we would be in a serious depression (technically; in reality we are there) from 2008 onwards. 

Ben has to do SOMETHING because it is impossible to sit there and do NOTHING.

Even according to Keynesianism, this is a total failure, since the Government should be spending money on stimulus projects to improve infrastructure.

There will be some sort of response to try to stop the deflation, instead of clearing the system of the debts and liabilities. 

StychoKiller's picture

Buy a toaster, err, a Spiderman beach towel, get a free bank!

CrashisOptimistic's picture

It is looking increasingly like the Germans are hunkering down. They will NOT allow maneuvers with the ECB that will come out of their pockets, and this most decidedly includes FDIC-style deposit guarantees.

I have been watching the forging of consensus that "the Germans will complain but in the end they will allow Eurobonds" and there has been nothing from the Germans to suggest that is true.

"They must! It's the only answer."

I think people have not figured out that Germany does not believe that an answer is necessary to life.

narnia's picture

Why would Germany want the EZ fractional banking system capitalized via deposit insurance like Japan & the US? The concept of TBTF only exists because of this, as does the certainty of hyper inflation.

Let the PIIGS depositors take the hit for their respective governments.

CrashisOptimistic's picture

But they won't. They'll just withdraw.

They'll self preserve, just like the Germans.

narnia's picture

If the Greek banks don't have EUR, they can't pay back depositors in EUR. Maybe the banking issue ZH has been addressing quite a bit lately has just escaped you.

chrsjrcj's picture

Actually Tyler, Europe does have a girl problem. Unless Merkel is no longer a girl?

StychoKiller's picture

There must be fifty ways to leave yer Zeuro -- (sorry, Mr. Simon!)

slaughterer's picture

I want the next iPad to be made in gold and have an automatic weapon app. 

WhyDoesItHurtWhen iPee's picture

But, What About Redenomination Risk?

  • To prevent deposit flight from fear of redenomination, the deposit insurance scheme would need to explicitly guarantee the euro-value of deposits
  • This type of scheme could solve both the guarantor credit-quality problem and the redenomination risk problem of the current system

Is this why the Euro is falling?

bsdetector's picture

Instead of recognizing banking losses at present levels the money printing by the various central banks (in all of their shapes and forms) will magnify future losses.

bsdetector's picture

The only solution is to physically hold Euros. Payment systems including debit and credit will fail. This appears as a new revelation; to the public anyway. I am sure the people who are in the know have been downplaying the issue all along. This situation will probably affect the viability of the Euro more than any other issue we have seen so far. Commerce may come to a halt. When I hit a green arrow the count increases in red. What is up?

Money 4 Nothing's picture

Jay Z... WaRNing!!   Check volume first.

I got 99 problems but a Bank ain't one..

Not office friendly..





dcb's picture

I disagree

1) the ecb can do what ever it wants, these boys don't play by the rules

2) when you do this, you have also got to wipe out bond and equity holders so you in fact create moral hazard. the moral hazard has been in backing bondholders and equity. this is the way capitialism is intended to happen

3) now you can introduce some real equity limits, or capitial. none of this leveraged crap 33/1

3) the deflation in asset prices while rapid, should be brief, but longer term stability increases because the system is less   leverrage

4) people will be allowed to buy bonds in teh new higher capitial level banks, older idiots who bought bonds in the overlaveraged banrupt banks are wipred out. those bonds go away for ever. once more gets rid of moral hazard

5) the printing of euros going into deposits isn't going to create inflation because you aren't incresing money supply.

6) this solves solvency issue, and things aren't working because all these central bankers want to solve solvency with liquidity issues

bsdetector's picture

I agree with 3 and 4. Failure is the only option.

StychoKiller's picture

"...When I awoke, a dire wolf -- six hundred pounds of sin!

Was grinning at my window, all I said was 'Come on in!'

Don't murder me!..." -- Grateful Dead, "Dire Wolf"

sockratte's picture

you mean, they only thought about sovereigns dependencies (bonds et al), when considering possible contagion? smart guys. ^^


sockratte's picture

does this mean, it implodes before greek elections? lmfao

grunk's picture

Those damn luftballoons!

catacl1sm's picture

Ah, good ol' fractional reverve roosters comin' home to roost.

Nobody For President's picture

Another proposed 'solution' that only seems to indicate there are too damn many Eurocrats in Brussels with not enough real work to do, so they come up with another idea de jour.

Or maybe they just like to tweak Germany...

earleflorida's picture

FDIC:  Woefully Underfunded? Dec.31,2013 the next great recession???

Note: Dec.31,2013 insured deposits fall-back[?] to $100K from current $250K ___  {shocking!}