The optional measures of deposit guarantee schemes : towards a new bank crisis management paradigm ?

Abstract

The role of deposit guarantee schemes is pivotal in banking crises. This role, however, should not be limited to only performing the so-called pay-box function. While this is deposit guarantee schemes' core function, and, as such, needs to be included in the safety net 'armoury' of every jurisdiction, optional interventions, both preventive measures and measures in the context of liquidation, can turn out to be more effective, from a system-wide perspective, to maintain financial stability and to reduce the destruction of value potentially resulting from an atomistic liquidation. Accordingly, the implementation of these measures by deposit guarantee schemes should not be hindered, but rather facilitated by the legal framework. Each European Union Member State should be encouraged (indeed required) to transpose in its domestic regime the provisions of the Deposit Guarantee Schemes Directive which deal with deposit guarantee schemes' alternative measures, thereby paving the way for a new bank crisis management paradigm. Nonetheless, a number of legal obstacles arising from the application of state aid rules and from the extension of the depositor preference rule in the liquidation process to deposit guarantee schemes, combined with a narrow reading of the least cost principle, need to be removed in order for deposit guarantee schemes to be able to successfully carry out optional interventions.