Finance ministers put banking union plans on ice

Eurozone finance ministers mothballed plans on Thursday to complete the banking union — a decade-long project born out of the financial and the sovereign debt crises — settling for narrower improvements to the bloc’s rules for handling bank failures.

Eurogroup chief and Irish Finance Minister Paschal Donohoe had hoped to reach consensus on a workplan sketching out a way forward on four parallel “workstreams,” including a common deposit insurance scheme, dubbed EDIS, to cover savers’ losses in case of bank failures. It also contained measures reducing banks’ exposure to sovereign debt; creating a single market for banking; and agreeing on common rules on how to deal with failing banks.

But the Irishman’s plan didn’t fly with capitals, with the main sticking point being Berlin’s opposition to EDIS. “For Germany, a full European deposit guarantee is not up for debate,” said Finance Minister Christian Lindner as he entered the meeting.

Still, Donohoe is determined to salvage something from all the effort that went into the work plan. He presented a statement on Thursday evening, agreed by eurozone countries, that calls on the EUROPEAN Commission to present proposals to strengthen rules for bank crisis management and national deposit guarantee schemes.

These initiatives should jump through the legislative hoops before the next European elections in 2024. But the other “workstreams” were shelved indefinitely.

“I made the case for broader, for big collective steps, but what the Eurogroup has done today is agree to a step that would be a clear and strong improvement on where we are today,” Donohoe told reporters after the meeting. “We will agree on an action plan at another point, and I hope another point soon.”

A long, strange journey

The Irishman had hoped to deliver a roadmap of sorts that would chart a legislative path for eurozone countries to follow, with the goal of securing EDIS. The common fund would in principle buttress and eventually merge national deposit guarantees, of up to €100,000 per deposit, into a single fund — effectively providing an added layer of protection to people’s savings in a severe bank crisis.

But it proved a non-starter for Berlin. “The focus will always be on national deposit protection,” Lindner said.

Donohoe is hardly the first who couldn’t crack the EDIS enigma. The Commission first proposed the bill in 2015, only to see it gather dust in Parliament and Council ever since. A major reason for the stalemate is the memories of the financial and sovereign debt crises a decade ago. Northern countries have long feared that a shared deposit insurance fund would put their lenders on the hook for Southern depositors when the next banking crisis hits.

“Risk reduction” thus became the North’s de facto policy stance in the EDIS debate. That camp maintained that EDIS would only come about once banks had cleaned up their balance sheets and the bloc had closed the major loopholes for bailing out lenders with taxpayer money. 

On the other hand, there were also objections from Italy, which rejected plans to introduce concentration charges on banks holding high amounts of national sovereign debt.

France then spearheaded a bid to loosen capital and liquidity ringfences that banks have across the bloc to ensure their subsidiaries can cushion a crisis — much to the disappointment of smaller countries, such as Luxembourg and Belgium. Allowing banks to move capital across borders would pave the way for eurozone bank mergers to materialize — as desired by top banking officials.

Donohoe’s work plan was supposed to address these issues in lockstep through legislation, over several years.

But now, the fact that he couldn’t advance the initiative means that EDIS as proposed is in question, particularly given the divisions between Italy and Germany over what should happen and when.

The debate is largely unchanged from last year, when talks also fell apart in mid-June, despite Donohoe’s efforts to wine and dine his way to victory. Rome continues to push back against Berlin’s demands of introducing stricter measures to reduce banks’ exposure to sovereign debt. Berlin, meanwhile, is opposed to introducing an EDIS that is too ambitious — leaving negotiations in deadlock.

For all of Donohoe’s efforts, savers are still vulnerable when the next banking crisis hits. Should a national insurance scheme become depleted in a crisis, there will be nothing to back it up.

Next steps

A stalled EDIS also leaves the banking union incomplete. Brussels introduced the three-pillar union in the aftermath of the financial meltdown of 2008. 

Two pillars are in place. One is that banks are subject to strict rules that define how big their capital buffers should be. The other ensures that they put money into a crisis fund to handle the cost of winding down operations. EDIS was supposed to be the third pillar to complete the strategy.

It’s unclear what lies ahead for EDIS. Chances are that talks will continue until another crisis emerges and forces the likes of Germany and Italy to reconsider their positions. Donohoe’s predecessor, Mário Centeno, often reminded journalists that the U.S. Congress discussed about 150 proposals over more than 50 years before it introduced a common deposit insurance system — at the height of the Great Depression in 1933.

“We will come back to it,” Donohoe said.