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Summary of Guidelines on Methods for Calculating Contributions to DGSs

1. EBA and the DGSD Directive

• Publication Date: 12 June 2014
• Transposition Deadline: 3 July 2015
• Risk-Based Contributions Deadline: 31 May 2016
• Full Phase-In of Repayment Deadline: 31 December 2023

The European Banking Authority (EBA) plays a key role in the implementation of the Deposit Guarantee Schemes Directive (DGSD). It is responsible for issuing guidelines on payment commitments (Art. 10(3)) and risk-based contributions (Art. 13(3)) to ensure consistent application of the DGSD across the EU. These guidelines aim to provide a high level of protection for depositors in a harmonised framework.

2. Mandate and Timeline

• The EBA is mandated to issue guidelines specifying methods for calculating contributions to DGSs, including:

  • A calculation formula
  • Specific indicators
  • Risk classes for members
  • Thresholds for risk weights
  • Other necessary elements

• The timeline includes:

  • A 7-working-day repayment deadline for full phase-in by 31 December 2023
  • An emergency payout scheduled for 31 May 2016

3. Objectives of Calculation Methods

The objectives of the guidelines include:

• Reaching the target level of DGS funding
• Ensuring contributions are proportional to liabilities
• Borne by banks
• Mitigating excessive risk
• Promoting harmonisation and a level playing field across the internal market

4. Necessary Elements of Calculation Methods

4.1. Risk Indicators and Weights

• Core Risk Indicators: 8 in total, accounting for at least 75% of the calculation. These include:

  • Capital (Leverage ratio, CET1 ratio)
  • Liquidity and funding (LCR, NSFR)
  • Asset quality (NPL ratio)
  • Business model and Management (RWA / Total Assets, RoA)
  • Potential losses of the DGS (Unencumbered assets / Covered deposits)

• Additional Risk Indicators: May be used up to 25%, but no single indicator can account for more than 15% unless it's a qualitative indicator.

• Calibration Options:

  • Bucketing Approach: Assigns discrete risk scores to ranges of indicator values
  • Sliding Scale Approach: Transposes each value into a unique risk score

4.2. Calculation Formula

$$
C _ {i} = C D _ {i} \times C R \times A R W _ {i} \times \mu
$$

Where:

• $C_i$: Annual contribution for institution $i$
• $CD_i$: Covered deposits for institution $i$
• $CR$: Contribution rate (same for all banks)
• $ARW_i$: Aggregate Risk Weight for institution $i$
• $\mu$: Adjustment coefficient

4.3. Contribution Rate (CR)

• CR is a percentage of covered deposits that a bank with average risk should contribute annually to reach the target level.
• It is calculated as:
  $$
  CR = \frac{\text{Annual target level}}{\text{Total covered deposits of DGS members}}
  $$
• The annual target level is spread evenly among members to ensure proportionality.

4.4. Aggregate Risk Weight (ARW)

• ARW is a risk factor specific to each institution, based on its risk profile.
• It assigns banks to risk classes (bucketing) or determines their relative riskiness (sliding scale).
• ARW ranges between 75% and 150% of the average, with exceptions allowing up to 200%.

4.5. Adjustment Coefficient ($\mu$)

• $\mu$ is an additional technical parameter used to adjust contributions based on the business cycle.
• It ensures that the DGS reaches its annual target level and avoids undershooting or overshooting.

5. Steps for Calculating ARW

1. Step 1: Measuring risk indicators (core and additional)
2. Step 2: Scoring the risk indicators (using bucketing or sliding scale)
3. Step 3: Aggregating individual risk scores to calculate the Aggregate Risk Score (ARS)
4. Step 4: Transposing ARS into ARW using either a bucketing or sliding scale approach

6. Optional Elements of Calculation Methods

• Minimum Contributions: Member states may choose to apply a fixed fee or a minimum fee instead of a risk-based contribution.
• IPS Membership: Reflected in the "Business model and Management" category (≤25%).
  • If IPS is not a DGS, it reduces the member’s ARW.
  • If IPS is a DGS, it increases the ARW for central entities.
• Low-Risk Sectors: May be reflected in the "Business model and Management" category, based on national regulation and empirical evidence showing lower failure rates.

Conclusion

• The proposed harmonised minimum formula for risk-based contributions ensures:
  • Reaching the target level while respecting the business cycle
  • Risk discipline
  • A level playing field in the internal market
• It respects the variety of business models and national banking sectors by allowing flexibility in criteria, scoring, and intervals.
• The guidelines also respect national options foreseen by the DGSD Directive.

EBA Contact Information

EUROPEAN BANKING AUTHORITY
Floor 46, One Canada Square, London E14 5AA
Tel: +44 207 382 1776
Fax: +44 207 382 1771
E-mail: info@eba.europa.eu
Website: http://www.eba.europa.eu