The Banking Union, along with the rest of the measures approved following the Global Financial Crisis, has increased the strength of the European banking sector, with capital ratios three times higher than before and a much-improved liquidity situation, both structural and cyclical. These advances have allowed, for example, in Spain, the resolution of a banking entity overnight and without the use of public resources (a clear step forward compared to the bailout of savings banks carried out with public money).
Despite these advances, which are recognized and verifiable by specialists, the average citizen is probably not aware of them. Moreover, they may think that nothing has changed for them, when everything has changed both for them and for the banks themselves. For that reason, it is essential to complete the Banking Union with an EDIS, a European Deposit Insurance Scheme, because only by offering European consumers a palpable improvement in their personal situation—something tangible—will we succeed in making the relevance of the Banking Union project understood.
For all these reasons, the recent proposal by the German Finance Minister, Olaf Scholz, to relaunch the creation of the so-called third pillar of the Banking Union—a common deposit guarantee fund for the entire eurozone—is so important. The symbolic value of this initiative must not, therefore, be minimized, especially since Germany is the country that has most opposed progress in this area.
From the AEB’s point of view, it is undeniable that this is an important step, although we fear it is not yet a definitive one. Specifically, the EDIS proposed by the German minister consists of a system of what is misnamed ‘reinsurance’ between the European fund and the various national funds, without substantial differences from the current regime (which already contemplates voluntary loans between national funds). And it is precisely there where the antiphrasis appears: there is no reinsurance where, as in the German proposal, risks are not shared. Let’s see why this is the case.
In a scenario of growing concern over the fragmentation of the financial system, the third pillar of the Banking Union ensures that a euro deposited in a European bank would have the same value, whether the bank were German or Greek. This would allow entities to compete on a level playing field and break the link between sovereign and banking risk.
In the German proposal, to the extent that depositor coverage remains subject to the situation of each Member State, that objective would not be achieved. National funds must exhaust their available resources before borrowing additional funds from the European body; loans that must be repaid, as soon as the national fund recovers, with contributions made exclusively by local entities. In other words, the link between banks and their sovereigns is not fully broken, and European entities thus survive with a marked national character. Or, in other words, the existence of a true Single Market is only possible if European citizens can freely choose the credit institution in which to place their trust, based on its solvency and not on the capacity of the State where it is domiciled, in the certainty that the single European system is what, ultimately, is guaranteeing their deposits.
Germany, moreover, conditions its proposal on progress being made in other areas, none of which are simple. Some are clearly desirable: greater fiscal harmonization in corporate tax, or moving forward with banking insolvency rules that are common to all banks operating in the Banking Union (allowing for less costly and more effective single European supervision).
But the third condition of the German proposal is undoubtedly the most difficult and complex. It involves eliminating the preferential treatment of public debt on bank balance sheets, something that is harder to achieve in practice than it might seem. There are two alternative approaches to this issue. The first is to force banks to hold capital for their sovereign debt holdings (in technical jargon, a positive risk weight when calculating their regulatory capital). But this is not simple and, in fact, no country in the world does it. Furthermore, in Europe there is no statistical evidence of sovereign defaults: in the last hundred years there have only been two sovereign bankruptcies in Europe, one in Germany after the Second World War, and the other in Greece, which was not strictly a bankruptcy. And if market information is used (credit ratings or sovereign spreads), we already know from the experience of the crisis that this will be brutally cyclical.
There is a second alternative: forcing banks to better diversify their sovereign exposures. That is, that banks do not only hold Treasury bonds from the country in which they operate, but from all Eurozone countries. This diversification would be even simpler if Europe could move forward in defining a European risk-free asset. In short, this second alternative is complex, but at least it is viable.
The reader probably thinks, by now, that this German proposal is as important as it is complex. And they are not wrong. But to make a path, it is necessary to take a first step and move forward. And we must not deny that the German proposal represents a step forward, of high symbolic value, which takes us into a journey that will be tortuous and difficult, full of twists and turns, but which must be traveled to complete a Banking Union that works for citizens.
José María Roldán, Chairman of the Spanish Banking Association
Carmen Rizo, Public Policy Advisor of the Spanish Banking Association
