Can the banking union work without common deposit Guarantees? The initial market assessment and policy implications

In late 2013 the European Central Bank (ECB) announced the list of candidate banks to its direct surveillance under the Single Supervisory Mechanism (SSM). Moving towards the European Banking Union (BU), the SSM fundamentally transformed the landscape of financial supervision in Europe since its inception. After several years, the BU is still incomplete, particularly in terms of depositors’ protection. Through this paper we assess empirically how markets valued the SSM in its path to implementation, and gauge whether they judged the SSM in itself sufficient to guarantee the stability of the European banking system, or whether they deemed the presence of an adequate Deposits Guarantee Scheme (DGS) as relevant. Based on six events from October 2013 to October 2014 for 96 European banks, our results suggest that the initial market assessment assigned little relevance to the presence of a DGS to guarantee the stability of the European banking system.