Russia is also experiencing concerns over the public’s confidence levels. It is no coincidence that the Russian government took initiatives to help boost guarantees for bank deposits in December 2014, as low world oil prices and sanctions were beginning to have a significant impact on Russia’s economy (particularly on the value of its currency). The Kremlin moved to allocate extra funds to the country’s Deposit Insurance Agency (DIA) and increase the deposit insurance coverage limit for individuals to 1.4 million rubles, the equivalent of about $18,300 under the current exchange rate.
Russia’s DIA is a busy entity: over the past two and a half years, the country’s central bank has shut down over 150 banks, with many others under crisis watch. In fact, on Jan. 29, Russia's Finance Ministry announced that it is considering requiring bail-ins of large depositors. While the move is designed to help protect the overall stability of the system, it indicates that the ministry expects more significant banks to face bankruptcy. With reduced energy revenues intensifying Russia’s economic problems, the importance of deposit insurance as a tool for maintaining public confidence, and therefore limiting social unrest, will grow.
Concern over internal stability also played a role in China’s decision (in May 2015) to introduce deposit insurance for the country’s banking system. Large bank failures are mostly unheard of in China, as the government generally steps in to assist banks and investors and implicitly guarantees deposits, especially at bigger banks. Politically, Chinese decision-makers feel that they cannot allow banks to fail, as such a move would further undermine confidence in the leadership and China’s economic system as a whole.
Nevertheless, the Chinese government recognized that by implicitly making guarantees, they are also failing to discourage banks and investors from making risky choices. China’s decision to introduce deposit insurance, therefore, was designed in part to highlight that there is a limit to government assistance and to encourage better investment decisions. While China’s system differs greatly from its Western counterparts, the Chinese leadership also aims to use deposit insurance to boost confidence and stability in its banking sector.
In Europe, as in the US, deposit guarantees have become a part of the social contract between the people and the authorities. But the question of which authorities are ultimately responsible for guaranteeing the deposits—and thus for safeguarding financial stability—has become significant. The future of deposit guarantees is one of the main points of contention between Germany and the eurozone’s other members.
Currently, there are EU-wide regulations on deposit insurance, but those are implemented on a national level. In November 2015, the European Commission officially presented its proposal for a European Deposit Insurance Scheme (EDIS). Under the plan, a European fund would be created, financed directly by bank contributions, and adjusted for risk. At first, the European fund would only be used if national-level deposit insurance funds exhausted their own resources but, over time, it would take on a greater role and fully insure all national deposit guarantees by 2024.
Germany opposes the scheme on the grounds that risk within the eurozone has to be reduced before such a risk-sharing plan could be viable. Fundamentally, for Berlin, the EDIS would represent a financial obligation to assist eurozone countries with troubled financial systems.
Countries such as Italy support the plan because it would provide a much stronger layer of security for depositors than simply relying on national-level insurance schemes. Deposit insurance is thus one of the elements of Germany’s geopolitical dilemma: on one hand, Berlin wants to safeguard the stability of the eurozone, but on the other hand, it would like to minimize its own financial contributions to other eurozone countries.
We saw a drama of this sort unfold in Cyprus in 2013. Cypriot banks were failing, and the Europeans, led by the Germans, refused to bail them out. The result was that banks were closed for several days and parts of deposits exceeding 100,000 euros were seized. The Germans argued that the Cypriot banks were being used by Russian money launderers, hence they deserved to fail because of imprudence and Russian corruption.
However, the Cypriot banks held deposits for entities that contributed significantly to the economy—including the hotels at the center of the tourism industry and British retirees who had saved a few hundred thousand euros in a lifetime of work and retired to Cyprus. The latter were devastated. The former could not pay their employees for weeks, and many never recovered from the crisis. What had been an uncertain proposition—putting their money in a bank in Cyprus—became a suicidal position. Cyprus has still not recovered.