Berlin, Frankfurt, Brussels Eurogroup boss Paschal Donohoe has failed in his attempt to complete the European banking union. The main reason for this was the strong resistance from Germany against a European deposit insurance (Edis) and from Italy against stricter requirements for government bonds.
The Handelsblatt learned from EU diplomats that it was no longer possible to close the gap between these two camps. Instead of a comprehensive package to strengthen the internal financial market, the 19 euro finance ministers would therefore only agree on a significantly slimmed-down declaration at their meeting on Thursday.
“I don’t see much more than a statement that describes the fields of action again, possibly with a new timetable,” it was also said in Berlin government circles. “Unfortunately, the suggestion was completely unsatisfactory far beyond Edi’s ongoing topic.”
As early as 2015, the EU Commission presented a proposal for a European deposit insurance scheme. From their point of view, this is essential for the completion of the European banking union after the introduction of a common bank supervision and a mechanism for the resolution of crisis banks.
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In recent years, however, little progress has been made on the subject of deposit insurance. Eurogroup boss Donohoe was therefore commissioned by the heads of state and government to present a roadmap for solving the problem.
Struggles for deposit insurance
Donohoe’s proposal called for introducing deposit insurance in two phases. As a first step, the most recent draft envisaged a reinsurance model in which national deposit protection funds could lend each other money if they were overwhelmed in crisis situations.
Only in a second step was a joint European liability for savings deposits planned. Before this phase begins, Member States should still have the right to stop the plan. In addition, the second phase should only start if banks meet stricter requirements by then and, for example, reduce the proportion of government bonds from their home country in their own balance sheets.
Banking Association: “That would be a major setback”
Despite these supposed safeguards, the federal government rejected Donohoe’s proposal at a meeting last week. In doing so, it also followed the line of the German savings banks and cooperative banks. Both financial groups have been campaigning against European deposit insurance for years because they fear they will then have to pay for ailing banks in southern Europe.
It is not surprising that no agreement could be reached on EDIS, said the Federal Association of German Volks- und Raiffeisenbanken on Monday. “For years, the focus has not been on strengthening the banking union by overcoming the fragmentation of the European banking market and reducing existing risks, but simply on mutualizing the existing deposit guarantee systems.”
The German private banking association BdB, on the other hand, sees the end of Edis again with mixed feelings. “If there is no agreement on a timetable for completing the European banking union on Thursday, that would be a major setback,” said BdB division manager Hilmar Zettler to the Handelsblatt. “From our point of view, the banking union is an important building block for the European single financial market.”
However, Donohoe’s suggestion was insufficient. “Especially in terms of market integration, it did not contain enough progress,” said Zettler. “Therefore, it is better not to make a compromise than to make an insufficient one.”
Italy is nervous about rising interest rates
Other elements of Donohoe’s reform package were also controversial. For example, Italy opposed the proposal to introduce an upper limit for government bonds in bank balance sheets. The government in Rome is nervous about rising interest rates on Italian bonds and has no intention of tightening the regulations in this situation.
In addition, several smaller member states boycotted plans to give banks more freedom to move capital and liquidity across borders. They fear that there could be liquidity bottlenecks in their countries in the event of a crisis.
In view of the large number of resistances, the finance ministers will probably only agree on a very small package of measures on Thursday. For example, you could instruct the EU Commission to harmonize existing directives on bank resolution – which the authority is already planning to do.
The failure of Donohoe’s reform plan drew mixed reactions from experts. It was an “honorable attempt,” says Sebastian Mack, banking expert at the Jacques Delors Center in Berlin. But in the end, the draft only reflected the deadlocked positions of the various countries. It is also clear how great the mistrust of governments is among themselves.
Banker complains about “narrow particular interests”
Large European banks in particular had hoped to be able to do more cross-border business with the completion of the banking union. A top German banker expressed his disappointment. “Donohoe’s phase one was an opportunity to get ahead of the curve in crisis management,” he said. “Especially in the current situation, the storm resilience of the monetary union should have been strengthened. That failed because of narrow-minded particular interests.” No one should be surprised or complain if, in the end, ad hoc interventions take place again and state aid flows – not least in Germany.
The CSU MEP Markus Ferber, on the other hand, is relieved. The Donohoe proposal did not solve any of the key problems, he said. When it comes to risk reduction in bank balance sheets in particular, a big step is needed and not tripping steps. “One should not continue to work on the basis of this paper – the member states have correctly recognized that.”
More: “Not ready to give the big banks the golden credit card” – savings banks and comrades rail against Brussels.