Germany objects to EU Commission’s plan for a Eurozone bank deposits insurance scheme but Berlin could go along

Commissioner Lord Hill (pictured here), responsible for Financial Stability, Financial Services and the Capital Markets Union while presenting the European Deposit Insurance Scheme (EDIS) plan said: “The crisis revealed the weaknesses in the overall architecture of the single currency…Now we need to take steps towards a single deposit guarantee scheme… step by step, we need to make sure that risk reduction goes hand in hand with risk sharing. That is what we are determined to deliver.” (© European Union, 2015 / Source: EC – Audiovisual Service , Shimera / Photo: Jacquemart Jennifer. The picture was taken on 30/9/15, on the occasion of a Press conference on the Capital Markets Union action Plan).

Last Tuesday the European Commission aired a groundbreaking proposal, about the creation of a euro-area wide insurance scheme for bank deposits. In this way the European Banking Union will start having a meaning for the average European. It’s a plan for a European Deposit Insurance Scheme (EDIS) which is meant to complete the Banking Union and this time with a direct effect on the real economy, securing the deposits of consumers and businesses. In reality, up to now the Banking Union edifice is structured to protect the financial sector from its own sins.

The EDIS design will progress in three steps. First, the deposit insurance schemes that exist in euro area member states will be re-insured in the EDIS. After three years the re-insurance arrangement will evolve into a co-insurance. During that period the contribution of the EDIS in the national insurance schemes will steadily progress. In 2024 the European Deposit Insurance Scheme will be fully accomplished and operational, having absorbed the national insurance systems. All along this procedure the banks will continue paying insurance premiums related to their creditworthiness, under the watchful eye of the European Central Bank.

In Athens as in Berlin

Progressively, the deposits in the roughly 6000 euro area banks will all be covered by the same insurance scheme in Athens as in Berlin, protecting deposits of up to €100,000. Today the national bank deposit insurance schemes offer the same coverage, but isolated as they are, their ability to actually deliver what they promise is questionable.

As explained by the Commission, there will be special safeguards against the ‘moral hazard’ and possible abuses of the EDIS plan by national insurance schemes. According to Commissioner Lord Hill, responsible for Financial Stability, Financial Services and the Capital Markets Union, the EDIS will “give incentives to national schemes to manage their potential risks in a prudent way”.

Mutualizing the risks

Of course, this is easier said than done because a number of euro area countries are currently faced with very severe realities. For example, even though Greece may be willing to manage banking risks prudently, the interconnections and the gray areas in its political-economic-business establishment have repeatedly blocked prudency in the banking sector. Everybody knows that in the euro area and mainly in the South, strong but invisible ties exist between the national banking system, the government and the business community.

It’s common knowledge that a large number of the systemic Eurozone banks are heavily and imprudently exposed to their own sovereign’s debt paper. In view of that, financial orthodoxy commands that ideally, the credibility of the banks (and consequently the calculation of their insurance payments/contributions to the EDIS scheme) should be related to the quality of the government and the private debt they are exposed to and this debt should be rigorously rated.

A difficult exercise

But if all the euro area systemic banks are called to undergo such a tough exercise, their capital needs may skyrocket to inconceivable levels. Consequently, it’s practically out of the question to truly and accurately relate the insurance premium the banks should pay to EDIS, with the particular and the overall trustworthiness of the given bank and country. At least not before the umbilical cord, connecting the lenders, the governments and the business community is definitively cut.

In reality then, the EDIS scheme, as announced by the Commission on Tuesday, will actually mutualize the banking risks amongst the 19 euro area countries. In this way it will transfer some risks from the less prudent to the more cautious. And this, to a much more extended level than the provisions of the now operational Single Resolution Fund and Board (the two instruments to be used in liquidating or rescuing a euro area failing bank) provide. By the way, it must be mentioned that still, the member states have not yet agreed on a common backstop (that is a common financing facility) to support the Single Resolution Fund in case of a sudden need exceeding the currently available means of the fund.

Does Berlin object rightly?

In view of all that, it’s quite natural that Germany strongly reacts to the EDIS plan. Already the Dow Jones Newswire reported from Berlin that a high-ranking official of the German ministry for Finance stated that the “Commission’s plan gives the wrong incentives and instead of helping reduce the risks, which are still quite national, it just distributes them to others”.

Obviously Berlin fears that the German voters would revolt, if one day they learned that they are to be burdened (through the obligations of their banks to EDIS) with the problems of the Greek banking system. Of course, the same is true in relation to the Italian, Spanish and some other euro area banks, which are heavily exposed to sovereign debt paper and to a huge pile of overdue loans in the housing sector. In Greece more than half of home mortgages and the business loans are overdue. It’s a reality that impedes the efforts to restore the Greek banking system back to its feet.

Germany has its own drawbacks

However, in this case too, the Germans appear to be using double standards. They point to the problems of the Greek, Italian and Spanish banks and don’t say a word about the problems of their own lenders. For one thing, a number of German regional banks are overexposed to the country’s failing shipping sector, while other German banks are still holding toxic overseas assets. As for their flagship lender, the Deutsche Bank, there is information that it sits quite uncomfortably on a mountain of risks rising up to €72 trillion.

At the end of the day then, Berlin should, and very possibly would comply with the Commission’s EDIS proposal – possibly after some modifications – because Germany’s own banking problems are not small. In any case, the pressures from the Commission and the ECB are high for the prompt realization of the EDIS plan.

Five Presidents said so

Not to forget, that the pivotal Five Presidents’ Report (European Commission’s Jean-Claude Juncker, European Council’s Donald Tusk, Eurogroup’s Jeroen Dijsselbloem, European Central Bank’s Mario Draghi, European Parliament’s Martin Schulz) entitled “Completing Europe’s Economic and Monetary Union“, concludes as follows: “A single banking system is the mirror image of a single money. As the vast majority of money is bank deposits, money can only be truly single if confidence in the safety of bank deposits is the same irrespective of the Member State in which a bank operates. This requires single bank supervision, single bank resolution and single deposit insurance.”

It’s very characteristic that Draghi has joined the politicians in advocating the creation of a single euro area wide deposit insurance scheme. Given that the single bank supervision and resolution apparatuses are already in place, the ECB is now pressing in a rather political manner for the creation of the a single bank deposit guarantee scheme. In this way, the ECB becomes Eurozone’s champion, longing for the creation of a truly level playing field in this 19 country financial universe, devoid of dark corners that presently impede the central bank’s monetary policies from serving all member states on an equal base.

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