Germany open to move on post-crisis bank reform

Failure to do so could be costly and leave the bloc vulnerable, country's finance minister insists

Photo: EPA German Finance Minister Olaf Scholz

Germany is willing to support a pan-European bank deposit protection scheme as long as individual countries remain chiefly responsible for shielding savers of a troubled bank, its Finance Minister Olaf Scholz said on Wednesday in an eight-page document entitled "Position Paper on the Target Image of the Banking Union", submitted to German magazine Der Spiegel.

Germany and other northern European allies have long been reluctant to back a joint scheme to insure euro zone deposits, fearing they will be accountable for problems encountered by financial institutions in Southern Europe such as Italy, Greece or Portugal. However, in the document, published in Financial Times as an op-ed as well, German Finance Minister Olaf Scholz said Berlin was finally willing to compromise and end the deadlock, arguing that Europe has to move forward. A failure to do so could otherwise be costly and leave the bloc vulnerable to "being pushed around on the international stage," particularly in light of the imminent withdrawal of the United Kingdom from the Union, he noted.

“We understand that compromises are necessary to complete (the) banking union,” Scholz told the media, referring to a package of wider reforms devised after the financial crash that include deposit protection. "But the need to deepen and complete European banking union is undeniable. After years of discussion, the deadlock has to end."

Scholz and Vice Chancellor in Chancellor Angela Merkel’s ruling coalition, suggested a four-step approach to complete the European banking union reforms. First, the EU must have common insolvency and procedure to wind up troubled banks, Scholz said, pointing to the example of the US Federal Deposit Insurance Corporation. Nevertheless, bank risks must be cut further.

“This means further reducing the number of non-performing loans and tackling the risks associated with sovereign debt,” he wrote.

“Sovereign bonds are not a risk-free investment,” he added. Banks should therefore have to make provision for risks arising from sovereign debt within an “appropriate” transition period, the minister said.

“Third - and this is no small step for a German finance minister - an enhanced banking union framework should include some form of common European deposit insurance mechanism,” Scholz said.

“However, such a scheme would be subject to certain conditions, one of which is that national responsibility must continue to be a central element,” he continued.

In the case of a bank failure, a three-step mechanism would then apply. First, the money of the national deposit guarantee scheme would be used. If those national resources are exhausted, a new European deposit insurance fund could provide limited additional liquidity through loans, Scholz said. If additional financing was still be needed, the home country of the failed bank would have to step in.

“A limited loss coverage component for the European deposit insurance fund could be considered, once all the elements of the banking union have been fully implemented,” Scholz said.

The fourth and final building block of reform is the creation of uniform taxation of banks in the EU, Scholz said.

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