Berlin, Frankfurt, Brussels Eurogroup boss Pascal Donohoe wants to tackle one of the most contentious issues in Europe’s financial architecture. According to EU circles, he will present a two-phase model for European deposit insurance during a video conference with the euro finance ministers on Tuesday.
With the step-by-step approach, he hopes to allay the concerns of the member states – especially those of the Germans.
From the point of view of the EU Commission and the European Central Bank (ECB), deposit insurance is of great importance as the third pillar of the banking union. After the financial crisis and the euro debt crisis, banking supervision was already assigned to the ECB. In addition, a European resolution mechanism for crisis banks was introduced.
On the other hand, the discussion about a joint deposit insurance scheme has not progressed for years – mainly because of resistance from Germany. The new federal government had declared in its coalition agreement that it was only prepared for a reinsurance system in which national security systems support each other in emergency situations. However, it rejects joint liability for savings deposits.
Donohoe’s proposal provides for a reinsurance model only in the first phase. In this, the European deposit insurance fund is to be slowly filled with capital that national deposit insurance companies can fall back on when they reach their limits in crisis situations. The national contributions to this fund would be measured by the extent of the risks in the respective banking systems.
The full liability of the European fund is then planned in phase two. Between phases one and two it should be checked whether the banks and governments meet a number of strict requirements. These include, for example, the volume of bad loans, but also the share of government bonds in the bank balance sheets. Phase two should start in 2028 at the earliest – but only if all governments agree at a so-called “checkpoint”.
Government veto remains in effect
“By dividing the process into two phases, we hope to get an agreement on phase one,” says a senior EU official. If all goes according to plan, the European Deposit Fund could be operational by early 2025.
“The checkpoint after phase one is politically very important,” says the EU official. “As long as we make it clear that national governments can veto the schedule, we can reach an agreement. Experience shows that once you start a process in the EU, it eventually leads to the goal.”
In Berlin, however, the proposal was rejected even before it was officially presented. Federal Finance Minister Christian Lindner (FDP) put his skepticism into cautious words on Monday. The video switch is an “occasion for exchanging ideas, I do not expect any resolutions,” he said.
There are still many difficult issues, such as the special role of the savings banks and Volksbanks. Or that many banks in the euro area still have a large number of government bonds on their balance sheets, said Lindner.
Berlin: Donohoe paper has not been agreed
In Berlin they became even clearer behind closed doors. The new proposal was neither “pre-negotiated nor did it reflect any agreement,” government circles said. One wonders whether the Donohoe paper is at all suitable as a basis for consultation. Because it ignores almost all findings from the financial crisis.
The proposals would envisage less settlement of losses and thus less liability for banks, but more liability for the bank resolution mechanism and thus for taxpayers. On the other hand, nothing will change when it comes to the issues that are important to Germany – more market integration, greater hedging of government bonds.
The German savings banks and cooperative banks, which protect savings deposits with their own security systems within their associations, do not want to take part in a European solution. “The banking union should relate in all its further developments to the large and extensively cross-border institutions,” said the German Savings Banks and Giro Association. “The savings banks are not prepared to give up their institutional protection system for a centralized European deposit insurance.”
The Federal Association of German Volks- und Raiffeisenbanken (BVR) criticized Donohoe’s plans for “only one – not further specified – consideration of the risk-reducing effect of institutional protection systems” in the calculation of contributions for the European deposit insurance. This ignores the fact that depositors are not compensated in the associations because the failure of banks is prevented as part of the institutional safeguards. In addition, Donohoe’s roadmap does not indicate “that the full communitarization of the national deposit guarantee systems is finally off the table”.
The envisaged expansion of European bank resolution to non-systemically important banks is “neither necessary nor sensible”, explained the BVR. Ultimately, the proposals from Brussels aim to reorganize the banking union, although there is no sign of a political consensus on this.
CSU MP Ferber: “Lindner has to be extremely careful”
“The proposals for completing the banking union are clearly flawed,” says MEP Markus Ferber (CSU). “There is too much talk about risk sharing and not enough about risk reduction.” The German private banks, which did not comment on Monday, are fundamentally more open to European deposit insurance than savings banks and cooperative banks. They believe that European deposit insurance is important to remove barriers in the banking market and strengthen Europe as a whole.
The German private banks, which did not comment on Monday, are generally more open to European deposit insurance than savings banks and cooperative banks. Deutsche Bank boss Christian Sewing is of the opinion that a common deposit insurance is important in order to remove hurdles in the European banking market and to promote a capital markets union.
“I totally respect that everyone has their point of view and their business model first,” said Sewing, who is also President of the Private Banking Association BdB, last year. “However, I believe that over time, even a business that is more focused on Germany will depend enormously on Europe.” That is why everyone should have an interest in a competitive Europe.
More: Savings banks are examining bad banks for troubled state banks.