05 November 2019

Financial Times: Germany’s Scholz gives ground on eurozone banking union plan

Germany’s finance minister has offered hope of a breakthrough in plans to create a full eurozone banking union by ending Berlin’s opposition to a common scheme to protect savers’ deposits.

Olaf Scholz said that Europe’s global role would be undermined if it failed to complete the integration of the eurozone’s financial sector. The plan to centralise oversight of eurozone banks was conceived seven years ago in response to the region’s deep sovereign debt crisis.

“The need to deepen and complete European banking union is undeniable. After years of discussion, the deadlock has to end,” Mr Scholz wrote in an opinion article for the Financial Times.

He said that Brexit, which would see the EU losing the City of London — its largest financial centre — also meant it was time for the bloc to promote better integration of its banks. [...]

The most surprising element in Mr Scholz’s proposals is his plan for a common EU scheme to shield depositors during a banking collapse. Germany has previously rejected such plans amid public hostility to any perceived attempt to put taxpayers on the hook for shaky banks in other countries.

The reinsurance system would act as a backstop to national funds, helping to ensure that governments can honour their legal obligation to protect deposits of up to €100,000 in the event of a banking collapse.

Accepting some form of common European deposit insurance mechanism was “no small step for a German finance minister”, Mr Scholz wrote.

However, his proposals come with heavy caveats and conditions, which are bound to spark concern in EU member states with weaker finances or fragile banking sectors.

They will also be contentious within Germany. Officials in Berlin emphasised that the initiative — in a so-called non-paper, for discussion only — was Mr Scholz’s alone and had not been co-ordinated with German chancellor Angela Merkel. It remains uncertain whether she will back the plans.

Past efforts to shift the debate in Germany foundered on the opposition of conservatives in Ms Merkel’s Christian Democratic Union, as well as the Sparkassen, or savings banks, which have their own, jealously-guarded deposit insurance scheme.

“Europe will not move closer together by shifting burdens on to others,” Helmut Schleweis, president of the German Association of Savings Banks (DSGV), said in September. “It is not the right moment to communitise deposit insurance schemes.”

However, there have been signs of a change of heart within the German finance ministry as the banking union project stalls.

Mr Scholz said that Brexit and the risk of dependency on China and the US compelled the EU to make headway. 

He has coupled his offer on deposit insurance with tough reform demands to help maintain discipline in bank supervision and resolution, and minimise the risk that Germany could be saddled with the costs of bank failures elsewhere in Europe. [...]

His demands include amending EU capital rules to remove incentives for banks to buy up large quantities of their home country’s sovereign debt; further action to reduce bad debts in the EU banking system; and the establishment of common European rules on calculating companies’ taxable profits.

Mr Scholz also wants the EU to harmonise bank insolvency law, saying a patchwork of national rules undermines EU attempts to make sure senior creditors share the cost of dealing with bank failures.

Full article on Financial Times (subscription required)

Olaf Scholz letter: Germany will consider EU-wide bank deposit reinsurance 

Related article

Financial Times: German eurozone banking plan wins cautious backing

European financial policymakers and supervisors have given a cautious welcome to proposals from the German finance minister Olaf Scholz to create a common deposit reinsurance scheme for the single currency zone.

But there was concern among some conservatives in Angela Merkel’s Christian Democratic Union, who said they had been blindsided by Mr Scholz’s intervention and warned it could destabilise the “grand coalition” government in Berlin.

“We still need to erect the banking union’s third pillar: European deposit insurance,” said Andrea Enria, head of the ECB’s Single Supervisory Mechanism, which oversees the eurozone’s biggest banks. “We hope to see signs that there is a little bit more openness to move ahead in this project.” [...]

A CDU adviser said Mr Scholz’s paper had come as a “complete surprise” to the Christian Democrats’ parliamentary group and would destabilise a coalition already roiled by disagreements over pension reform and foreign policy.

The adviser said the CDU was still insisting that a common deposit insurance scheme could only be introduced once non-performing loans on bank balance sheets had been reduced. “These processes must happen in sequence, not in parallel,” he said. [...]

German banks have been vocal opponents of a eurozone deposit insurance scheme. However, Hans-Walter Peters, head of the Association of German Banks, welcomed Mr Scholz’s proposals on Wednesday, saying: “The fact that the German ministry of finance is distancing itself from the European Commission’s previous proposal for a communitisation of deposit guarantee schemes is an important step in the right direction.”

Olivier Guersent, the European Commission’s director-general for financial stability, said Mr Scholz’s intervention was “a bold move and very welcome”. But he said his ideas were “unambitious vis-à-vis what the commission think is necessary”. [...]

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