August 7, 2020

Germany yields and is willing to negotiate European deposit insurance

Berlin correspondent



The actions of the European banking sector are rising generally after the German Finance Minister, the Social Democrat Olaf Scholz, published an article today in the British economic newspaper Financial Times, in which he declares himself willing to unlock the negotiation of European bank deposit insurance. Scholz states that "we understand that the commitments are necessary to complete the banking union" and proposes a common reinsurance plan to support the various national schemes, ensuring that this "would significantly improve the resilience of the national deposit guarantee".

A European deposit guarantee would free the fate of the banks to the ability of their national governments to rescue them. Its lack has contributed to large valuation discounts for banks in countries that have higher debt burdens, such as Italy, Portugal and Greece. Until now, Germany had been the biggest obstacle to a European Deposit Insurance Plan (EDIS), as it fears that its savers could be looted to rescue the banks collapsed by default in southern Europe. "A European deposit reinsurance system would significantly increase the resistance of national deposit guarantee systems," the Minister of Finance now changes, while warning that "such a system would have to meet several conditions, one of which is that the national responsibility must continue to be a central component. "

Scholz, as the word "reinsurance" underlines, in deliberate italics in the article, does not intend to simply transfer the classic deposit guarantee to the European level. Rather, defend a step system. First, national security systems must enter into force. If your funds run out, a European fund could provide resources. Third, finally, the affected member state could be claimed. Scholz explains in the article that this "is not a small step" for a German Finance Minister.

In exchange for its concession, Scholz calls for a more strict and uniform settlement and bankruptcy mechanism for all banks. As an example, he explicitly mentions the American Federal Deposit Insurance Corporation (FDIC). According to their criteria, not only should settlement rules be standardized for large banks, considered systemically important, but also for small financial institutions. This, for example, would make it difficult for the Italian Government to protect regional banks or their creditors again in the future.

As a second condition, Scholz mentioned that banks are initially further reducing risks on their balance sheets and that they should reduce the volume of their loans threatened by default. It requires that in the future also government bonds have to be covered with capital according to their risk, while so far, these securities are exempt from regulatory requirements. "Over time, banks in Europe will build broader portfolios of government bonds," Scholz calculates. This condition of the capitalization of government bonds has so far been firmly rejected by countries in southern Europe, such as Italy.

Finally, Scholz calls for greater harmonization of the tax system and fewer opportunities for evasion within Europe. It advocates a uniform basis for corporate taxes and minimum effective rates. "We have to make real progress," he says, with an eye on greater banking integration in Europe, "there is no option to rely on the United States or China for financial services."

The article does not clarify the degree of internal agreement within the great coalition about this proposal, but it already includes the first criticisms in Germany. Helmut Schleweis, head of the influential German Savings Bank Federation, rejects the proposal, claiming that "it is not the right time to communitize deposit guarantee systems."

The truth is that, by linking his proposals to an additional unspecified reduction in delinquent loans, Scholz once again avoids the question of how much risk reduction would be sufficient to satisfy Berlin and its banks. Regarding sovereign credit ratings, ECB banking supervisor Andrea Enria delivered a speech on Tuesday about the end of the banking union that made no mention of sovereign risk weights, and left much room for the need for an EDIS suitable. Analysts therefore greet the turn of the German position, but do not consider that an agreement on European deposit insurance can still be found in the short term.

. (tagsToTranslate) germany (t) negotiate (t) insurance (t) deposits

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