When the safety net fails

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: When Northern Rock ran into disaster last September, it was not only panicky British depositors who queued up to withdraw their savings from the stricken mortgage lender. In Dublin hundreds of Irish depositors did too. They were soothed only when Alistair Darling, Britain’s chancellor of the exchequer, told them that in the case of Northern Rock, the deposit-insurance scheme applied on both sides of the border.

In the EU, the implications of that bank run have given a new urgency to efforts to harmonise the system of deposit insurance. EU banks have an automatic “passport” to operate branches in other member states. But there is so little clarity about how foreign depositors would be treated in the event of a bank failure that regulators fear a cross-border panic could easily erupt.

Even before the Northern Rock affair, European Commission experts were working on improvements to a 1994 directive that sets minimum standards for deposit insurance. Currently, the law is confusing. It stipulates that a scheme should cover a minimum of euro 20,000 ($31,200). However, it allows countries to decide on things such as co-insurance (ie, the depositor bears some of the risk); whether the scheme has paid-in funds; or whether it relies on the remaining healthy banks to chip in after a failure. In the EU no two countries’ systems are the same.

Harmonisation is hard to pull off, however. Since 2003, Nordea, a bank forged from mergers in Sweden,

Norway, Finland and Denmark, has been negotiating with different deposit-insurance schemes in the four countries. All are pre-funded, but at different levels. Nordea contributes to all four. It wants to become a Societas Europaea, which would give it residence in Sweden, with branches rather than subsidiaries in the other countries. But Sweden’s neighbours will not let it transfer the deposit-insurance contributions it has made to them to Sweden.

If this is all so thorny in Scandinavia, it could be even worse farther south. Members of the European Forum of Deposit Insurers recently met in Italy to discuss fixes. They made six suggestions, including speeding up payouts, ideally to a few days. They put particular emphasis on ensuring the public was better informed.