Germany openly seeks more advantages for its banks

General view of the meeting room of the Ecofin Council, regrouping the 27 EU ministers of Finance, (EC Audiovisual Services, 14/5/2013).

The Commission proposal for a Bank Resolution and Recovery Directive divided deeply the Ecofin council in its yesterday’s Brussels meeting. Again the division took the form of North versus South or rather Germany & Co against everybody else. Mr Wolfgang Schauble, the German Federal Minister for Finance, insisted that the line of funds to be used by national resolution authorities in bail-in operations in case of a bank failure should contain also the unsecured deposits. France, Spain and Luxembourg maintained that unsecured deposits should be given a clear preference in relation to other bank creditors.

Apart from that even the issue of the theoretically secure deposits of up to €100,000 was not unanimously agreed. In both cases Germany wanted to degrade as much as possible the creditworthiness of all Eurozone banks, in order to underline the fame of its own lenders as the most creditworthy, despite the fact that the Deutsche Bank recently lied by saying it won’t be needing more capital from its shareholders. Let’s take one issue at a time.

The bank resolution directive

According to the Commission the proposed directive is aimed at providing national authorities with common powers and instruments to pre-empt bank crises and to resolve any financial institution in an orderly manner in the event of failure, whilst preserving essential bank operations and minimising taxpayers’ exposure to losses. It establishes a range of instruments to tackle potential bank crises at three stages: preparatory and preventative, early intervention, and resolution.

In view of that yesterday the Ecofin council discussed exactly this framework for the recovery and resolution of credit institutions and investment firms, focusing in particular on the design of the bail-in instrument. This tool will guide the national authorities over the line of funds to be used in the event of a resolution of a failing or about to fail bank. The two Cypriot banks were a test of this procedure. However in the Nicosia case the solution agreed by the Eurogroup and the Cypriot authorities was entirely provisional exactly because this proposed directive is still not in force.

In any case what is now at stake is the line of funds to be used in resolving or rescuing a failing bank. The only point that yesterday’s Ecofin council agreed was that shareholder funds will be used first. From that point onwards, that is the rest of funds to be used in a bail-in procedure, everything remained in the air. The reason for the disagreement was that Germany wants to use this affair, to boost the largely fictitious strong creditworthiness of its national lenders and more so of Deutsche Bank.

It goes without saying that France cannot accept that, expressing also the interests mainly of the Italian, Spanish and Luxemburg’s banks. The key point is the fate of the unsecured deposits above the €100,000 benchmark. If those deposits are to be placed entirely at the discretion of the bail-in authorities and not be given any preference, the slightest difference in the public and market perception about which banks are more secure than others, may create a major comparative advantage for some. If rightly exploited, this advantage can create two major categories of Eurozone banks, the secure and the less secure ones. The latter will be forced to pay more dearly for their funds and seemingly Germany & Co hopes to monopolise the former category.

According to the official Press release issued by the Council after the Ecofin was concluded its Presidency noted that there was:
* agreement amongst most member states that deposits under €100,000 must be fully guaranteed;
* considerable support for depositor preference (i.e. last category of assets to be bailed in), with some reservations raised on giving preference to large corporate deposits.

What Germany wanted

In both cases Germany wanted the Directive to contain the least possible reassurances to bank account holders, so as its own banks and more so the Deutsche Bank emerge as the most secure of them all. As a result Berlin is reserved over a full and unquestionable reassurance to be included in the Directive that all deposits of up to €100,000 are completely safe and their owners will be fully paid in the event of the bank’s resolution. Sources from the Ecofin council say that Germany contested also the preference to be given to holders of deposit accounts above the limit of €100,000.

Germany maintains that all account holders be given the least possible coverage by the directive.
Berlin follows now exactly the same policy line that Germany held in the case of the recent resolution and recovery of the two Cypriot banks. In this case the Eurogroup, under strong German pressures echoed and blindly followed by its Berlin loving president, Jeroen Dijsselbloem, had initially accepted that a haircut could be given even to deposits under the €100,000 benchmark. Then Berlin was at roof tops about the deepest possible haircut to be given to Cypriot deposits of above €100,000. At that time Paris was short-sighted in supporting Berlin destroy the Cypriot banking system. Yesterday however the French minister of Finance, Pierre Moscovici, was obliged to explain his change of position regarding both, the haircut of deposits under €100,000 and the preference to be given or not to larger deposits.

There is no doubt that Germany wants the Bank Resolution and Recovery Directive to contain the least possible reassurances to all bank account holders, so as its own national lenders and the Deutsche Bank gain a comparative advantage.

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