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

Commissioner Lord Hill, 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).

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.

Advertising

Advertising

Advertising

Advertising

Advertising

the sting Milestone

Featured Stings

Can we feed everyone without unleashing disaster? Read on

These campaigners want to give a quarter of the UK back to nature

How to build a more resilient and inclusive global system

Stopping antimicrobial resistance would cost just USD 2 per person a year

UN rights expert ‘strongly recommends’ probe by International Criminal Court into ‘decades of crimes’ in Myanmar

New UN Global Climate report ‘another strong wake-up call’ over global warming: Guterres

The digital transformation is a skills and education opportunity for all. Companies must use it

US cities are going to keep getting hotter

Connectivity and collaboration in the ICT industry: the key to socio-economic development

Euro-Mediterranean Assembly fixes its permanent seat in Rome

This underwater restaurant teaches you about the ocean while you eat

We can feed the world in a sustainable way, but we need to act now

Erdogan’s electoral win on a ‘me or chaos’ dilemma means trouble for everybody

EU on track to end use of chemicals harming the ozone layer

Why we need artists who strive for social change

Children are so hungry in one British town they are eating from bins

Quality of air in Bucharest-Romania: is it fog or is it smog?

Wednesday’s Daily Brief: Diplomacy for Peace Day, #VaccinesWork, the cost of war on Afghans, tech and well-being

Sweden must urgently implement reforms to boost fight against foreign bribery

Who holds the key to the future of biotechnology? You do

Economy on a steady rise in Latin America and Caribbean region ‘despite international turbulence’ – UN report

Mergers: Commission approves Synthomer’s acquisition of Omnova, subject to conditions

Human rights breaches in Nigeria and Burundi

Statelessness for terrorists’ families, never an acceptable option, urges UN rights chief

‘Eco-shaming’ is on the rise, but does it work?

EU/Africa, Caribbean and Pacific: towards which partnership?

China and UK relations post Brexit as EU addresses Chinese takeovers

Students in Milan are moving in with the elderly to fight loneliness and save money

How can newspapers survive? By measuring their social impact

China confirms anti-state-subsidy investigation on EU wine imports

Climate change: cutting the good by the root?

Monsoon rains turn millions of children’s lives ‘upside down’ across South Asia

Three ways Finland leads the world – and education isn’t one of them

UN General Assembly urges greater protection for Palestinians, deplores Israel’s ‘excessive’ use of force

Quality education an ‘essential pillar’ of a better future, says UN chief

The latest technology isn’t enough – you need the business model to go with it

Further reforms needed for a stronger and more integrated Europe

Northern Bahamas ravaged by ‘disaster of epic proportions’ as UN releases $1 million in emergency funds

CO2 emissions around the world

ILO: Unemployment to increase by 8.1 million in 2013-2014

UN-based World Summit Award (WSA) presents its master list on digital innovation with impact on society from 24 countries

One-third of Afghans need urgent humanitarian aid, millions suffer ‘acute food insecurity’

Remarks by H.E. Ambassador Zhang Ming At the Reception in Celebration of the 70th Anniversary of the Founding of the People’s Republic of China

Back to the future: flying cars are becoming a reality

UN mission in DR Congo appeals for calm as violent protests continue

Berlin favours economic and social disintegration in certain Eurozone countries

UN agencies urge Brunei to repeal new ‘extreme and unjustified’ penal code

EU investment budget for 2020 must focus on the Europe of tomorrow

First aid in six months reaches families in western Yemen, ‘timelines’ slip over Hudaydah ceasefire talks

European Commission presents comprehensive approach for the modernisation of the World Trade Organisation

‘Deteriorating’ human rights in Belarus amounts to ‘wholescale oppression’: UN expert

‘Good enough’ global cooperation is key to our survival

COP21 Paris agreement: a non legally-binding climate pact won’t stop effectively global warming while EU’s Cañete throws hardest part to next Commission

COP21 Breaking News_03 December: Argentina Accepts KP Amendment

A roadmap for destination management in the digital economy

Israel is joining forces with Arab states to save coral from climate change destruction

Finland should do more to improve job prospects of low-skilled youth

Fossil fuel support is rising again in a threat to climate change efforts

Draghi drafts a plan to donate more money to bankers, the era of ‘money for nothin’ is flourishing

How each country’s share of global CO2 emissions changes over time

It’s getting harder to move data abroad. Here’s why it matters and what we can do

Women’s leadership ‘critical’ to future of Niger

UN working ‘intensively’ to stop Ebola in eastern DR Congo, following second case in major border town

What are the real targets of EU’s efforts to fight tax evasion?

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s