European Deposit Insurance: Back to square one
The Germans have won: European Deposit Insurance will not be implemented. This is the way to say goodbye to the completion of the banking union. New examinations for banks and perhaps the bail-in for government bonds are coming. For Italy, hard times on the horizon?
Change of course by the Commission
It is now official: the third piece of the Banking Union, namely the European insurance of deposits, will never arrive. The proposal presented by the Commission on October 11, even if its title refers to the “completion of the banking union”, in fact marks the surrender to the German line: the common deposit insurance is not to be done.
In fact, the Commission’s proposal foresees that the future European Deposit Insurance Scheme (Edis) will only make loans to national deposit insurance systems, if they have used up their money. There will therefore be no sharing of losses, even if the mechanism is called (improperly) “re-insurance”.
To tell the truth, it is foreseen that in a few years’ time we may move on to a co-insurance mechanism, in which the European Edis system contributes, together with the national ones, to sustain any losses generated by the reimbursement of depositors of banks placed in liquidation. But the activation of the second phase is anything but a foregone conclusion. On the contrary, it is subject to the banks passing an Asset Quality Review (AQR) and reducing any excessive risks still present on their balance sheets. This review must be carried out by 2022. In other words: no rush, the (possible) co-insurance phase can wait five years.
Compared to the proposal made by the Commission two years ago, the one put forward now represents a resounding setback. The 2015 document envisaged, after a phase of genuine re-insurance and one of co-insurance, to move to a common fund at European level, to guarantee the repayment of deposits of liquidated banks (up to the threshold of 100 thousand euros) according to a well-defined timetable, albeit with due gradualness.
That proposal responded to a very precise need: mutual insurance between European countries should make the deposit guarantee system more solid, increasing the resources of the insurance fund compared to the case where each country has its own, separate from the others. It also aimed to implement the political project at the basis of the Banking Union: once the controls on banks have been centralized (entrusting them to the ECB) and once the new mechanisms for managing banking crises have been introduced (read bail-in), risk sharing can be carried out, by pooling the deposit guarantee mechanism. Now, compared to the original project, the phase of European insurance has been cancelled, and that of co-insurance has become hypothetical.
Why this setback?
Because the German government vetoed the completion of the project, fearing that it would turn into a unilateral transfer of resources from Germany to other European countries. The argument put forward by the Germans is: “before sharing the risks, we must reduce them”. The document released by the EU Commission seems to have come from the pen of German Finance Minister Wolfgang Schäuble where it states: “legacy risks must be resolved in the banking sectors that have generated them, before the phase of co-insurance begins”.
The principle advocated by the Germans is not in itself wrong. The problem is that it seems to have become a negotiating tool to postpone risk sharing indefinitely. In the meantime, risks are being reduced, as seen with the recent ECB provisions on automatic write-downs on impaired loans.
The Commission document is not only disappointing, it is also alarming. It announces a proposal by the Commission itself, coming in the next few months, to transform the European Stability Mechanism (ESM) into a European Monetary Fund (EMF). We still do not know the details, but we can reasonably suspect that the Commission will once again fall in line with the German position, which envisages an EMF as guardian of the Fiscal Compact and endowed with the power to impose losses on the holders of public bonds of a country, should the latter request its financial assistance: a sort of bail-in applied to public debt. This is what can be read in Schäuble’s “testament”, presented at the last meeting of European finance ministers.
If these proposals were to become reality, very hard times lie ahead. Perhaps our politicians should think more about how to negotiate on the European front and a little less about their alliances and quarrels, which are looking more and more like domestic disputes when compared with the issues being discussed in Europe.