Europe May Raise Deposit Insurance to Stem Crisis

By Brian Swint and Elizabeth Konstantinova

Oct. 7 (Bloomberg) -- European Union finance ministers are considering a fivefold increase in deposit insurance for consumers across the EU after failing to agree on a U.S.-style bank-bailout fund to stem the deepening global credit crunch.

Increasing deposit guarantees to up to 100,000 euros ($135,000) is ``an issue under examination,'' Irish Finance Minister Brian Lenihan told reporters in Luxembourg today at a regular monthly meeting of finance chiefs. Luxembourg's Jeannot Krecke said the ministers will ``quite certainly come up with a proposal today'' that ``will go further than just guaranteeing the safety of deposits.''

Ministers from the 15 countries sharing the euro yesterday failed to come up with specific plans to ease concerns on financial markets after European stocks dropped by the most since 1987. Luxembourg Finance Minister Jean-Claude Juncker, who led yesterday's meeting of euro-area counterparts, said they ``reinforced arrangements concerning deposit protection.''

The debate followed rescues of major European financial institutions in recent days. Money-market rates rose to records today as U.K. lenders held talks with the government on emergency funding and Iceland took steps to bolster its banks amid an unprecedented credit squeeze.

EU leaders meeting in Paris last weekend asked the European Commission to propose new rules on bank-deposit guarantees. EU governments currently must assure that there is a guarantee fund covering at least 20,000 euros in savings accounts.

`End of the Road'

``We haven't seen a run on banks by households yet,'' said Sylvain Broyer, an economist at Natixis in Frankfurt. ``That's the end of the road and something to avoid by any means necessary.''

There appeared to be little support for suggestions that Europe create a U.S.-style bank rescue fund. Italian Prime Minister Silvio Berlusconi and French Finance Minister Christine Lagarde both have suggested a plan modeled after the $700 billion fund approved by Congress last week.

``We all agreed that we want to do all we can to avoid financial institutions of systemic importance failing,'' Juncker said yesterday.

Ireland's parliament on Oct. 2 passed legislation guaranteeing 100 percent of the deposits and borrowings of six Irish banks. The action triggered complaints from governments and the European Central Bank that the country was acting alone to tackle the banking crisis.

``One country's solution is another country's problem,'' Swedish Finance Minister Anders Borg told reporters in Luxembourg today. ``We need to push for a common solution.''

Criticism of Ireland

The ECB said the Irish government should have ``properly'' informed the EU before announcing the bank-guarantee plan. And EU Competition Commissioner Neelie Kroes asked Ireland to expand the measure to include non-Irish banks to comply with EU rules that prohibit discriminating in favor of domestic institutions.

EU countries ``will take whatever measures are necessary to maintain the stability of the financial system,'' the 27 EU member countries said in a joint statement released yesterday by Berlusconi's office. ``We will continue to take the necessary measures to protect the system so that individual depositors in our countries' banks do not suffer any loss of money.''

Finance ministers today also debated proposals to link executive pay more closely with performance and for more investor and regulatory scrutiny of compensation packages. They also discussed ways to combat value-added-tax fraud and capital requirements for insurers.

Europe's Dow Jones Stoxx 600 Index added 0.2 percent to 241.93 at 11:25 a.m. in London after dropping the most since October 1987 yesterday. The euro fell below $1.35 for the first time in a year.

To contact the reporters on this story: Brian Swint in Luxembourg at bswint@bloomberg.net; Elizabeth Konstantinova in Luxembourg at ekonstantino@bloomberg.net.