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.







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 launches drive to highlight environmental cost of staying fashionable

How supporting climate action on a local level can transform the world

We had the hottest June ever this year – this is what happened around the world

The financial world upside-down: debt failure closer

Juncker Investment Plan for Europe welcomed by European Youth Forum

Gender parity can boost economic growth. Here’s how

MWC 2016 LIVE: Orange targets VoLTE and Voice over Wi-Fi; strikes Google partnership

EU budget: Commission proposes most ambitious Research and Innovation programme yet

4 innovation hotspots in the Arab world

Take action on air pollution to save lives, and the planet, urges UN chief

Why Sweden’s cashless society is no longer a utopia

This is how music festivals are tackling plastic waste

Tuesday’s Daily Brief: Venezuela-Colombia baby breakthrough, Italy piles on rescue boat pressure, States must combat hate, Kashmir rights latest and a musical plea to combat CAR hunger

Syrian Constitutional Committee a ‘sign of hope’: UN envoy tells Security Council

Microplastics have been found in Rocky Mountain rainwater

‘No justification’ for attacks against civilians, UN envoy says on mounting cross-border violence in Gaza

European Commission welcomes the positive assessment about how it has managed the EU budget

More than 90 per cent of Africa migrants would make perilous Europe journey again, despite the risks

How India is harnessing technology to lead the Fourth Industrial Revolution

Girls groomed for suicide missions fight back against the extremists of Lake Chad

These 5 foods are under threat from climate change

Rule of law in Hungary: Parliament should ask Council to act, say committee MEPs

Welcome to the age of the platform nation

Africa-Europe Alliance: Denmark provides €10 million for sustainable development under the EU External Investment Plan

‘Repeated attacks’ could close down key hospital in eastern Libya, says WHO

Brexit: political groups discuss options for an orderly withdrawal

UN condemns Syrian ‘war on children’ as up to 30 reportedly killed in clashes

This new solar technology can be printed or woven into fabric

Hostilities in Syria’s southwest, mean cuts in vital aid across Jordanian border: Senior UN official

My twin from Guangzhou

FROM THE FIELD: 10,000 Indonesia quake survivors to receive UN tents

How to help companies become global defenders of LGBTI rights

World ‘not yet on track’ to ensure children a better future: UN rights chief

Alarming level of reprisals against activists, human rights defenders, and victims – new UN report

EU budget: the Common Agricultural Policy beyond 2020

How revealing the cost of coal makes us all better off

Global aid needed for healthcare

Only one in five countries has a healthcare strategy to deal with climate change

The European Commission to stop Buffering

Large parts of the world are growing more fragile. Here are 5 steps to reverse course

Mine ban agreement ‘has saved countless lives’, but ‘accelerated efforts’ needed to end scourge for good: Guterres

Here are 4 of the most politically charged World Cup games ever played

Fed and ECB prepare a new party for the financial sharks

This is why Dutch teenagers are among the happiest in the world

Paid paternity leave should be the norm in the US

Overcoming the paralysis of trust management across a fractured IT landscape

The Peoples are missing from EU’s monetary union

“A global threat lies ahead worsened after the EU’s green light to the Bayer-Monsanto merger”, a Sting Exclusive by the President of Slow Food

Create conditions for ‘harmony between humankind and nature’, UN chief says on sidelines of G20 in Japan

How banking with blockchain can stamp out corruption and increase financial inclusion

5 things you need to know about water

“As German Chancellor I want to be able to cope with the merger of the real and digital economy”, Angela Merkel from Switzerland; the Sting reports live from World Economic Forum 2015 in Davos

Four things Turkey did for business in the G20

Millennials (and Gen X) – Here are the steps you should take to secure your financial future

Impacting society with digital ingenuity – World Summit Award proclaiming the top 8 worldwide

“Leaked” TTIP document breaks post 8th negotiations round silence and opens door to critics

Zhua Zhou: Choosing The Future

“Be aware where you put your I Agree signature on and something else”; now Facebook by default opts you in an unseen private data bazar

Japanese law professor elected new judge at the International Court of Justice

This team of Saudi women designed an award-winning app to make the Hajj safer

More Stings?

Speak your Mind Here

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

You are commenting using your 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