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Dijsselbloem Says EU Needs Long-Term Common Deposit Backstop

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Dutch Finance Minister Jeroen Dijsselbloem
Dutch Finance Minister Jeroen Dijsselbloem said the euro area needs to press ahead with creating new tools to recapitalize banks, such as rules for when the European Stability Mechanism can provide direct aid. Photographer: Jock Fistick/Bloomberg

May 7 (Bloomberg) -- Common deposit guarantees will be necessary to complete the European banking union project, Dutch Finance Minister Jeroen Dijsselbloem said.

“That will be the final building block of the banking union, a necessary block,” Dijsselbloem, who heads the group of euro-area finance ministers, said at a conference in Brussels today. Precursors include new rules on bank resolution, common standards for national deposit guarantees and a European bank resolution scheme that is due to be proposed in June, he said.

The euro area needs to press ahead with creating new tools to recapitalize banks, such as rules for when the European Stability Mechanism can provide direct aid, Dijsselbloem said. “We need to have the instruments to deal with the problems, because just exposing problems in banks and not having an answer” for recapitalizing them “would be very dangerous.”

European Union leaders began work on a banking union last year to break the cycle of contagion between nations and their banks that has plagued the euro area in the past three years. Leaders started by giving the European Central Bank bank supervision powers throughout the euro area.

International Monetary Fund Managing Director Christine Lagarde said the EU must put in place the ability to backstop its financial system so troubled lenders don’t paralyze nations’ economies.

‘Zombie Banks’

“They need to have available the tools to remedy the situation of those zombie banks, not the other way around,” Lagarde said in Amsterdam today. “You need the money first to be able to stop the problem.”

The next step will be a June proposal for a single resolution mechanism, EU Economic and Monetary Affairs Commissioner Olli Rehn said today. Common deposit insurance isn’t out of the question, he said.

“‘We are ready to contemplate what kind of proposal for a single deposit guarantee scheme we will make,’’ once bank resolution plans have advanced, he said.

Olivier Guersent, head of cabinet for Michel Barnier, the EU’s financial services chief, said the the priority should be to secure an agreement on upgrading national deposit guarantee programs. He said that while the proposals could be a stepping stone, there are no plans to offer common deposit insurance anytime soon.

June Deadline

‘‘The current position of the commission is: ‘Look, let’s not let the second step take hostage of the first one,’” Guersent said today. If current proposals don’t move forward, “there will be nothing to link, and ultimately nothing to merge,” he said.

EU leaders have set a June deadline for governments and the European Parliament to agree on a bank failure law that lays the groundwork for the forthcoming Europe-wide bank resolution scheme. In the absence of common rules, European Commission data show the bloc’s governments have injected 1.7 trillion euros ($2.2 trillion) into their banks since 2008.

German Finance Minister Wolfgang Schaeuble said today that the EU must press ahead with banking union as much as it can under the bloc’s current treaties. Germany has been one of the leading skeptics on the next steps in the project, saying EU treaties don’t offer enough of a legal framework for some of the proposed common elements.

“We can’t wait, given the inertia we have in Europe, until we achieve treaty changes to solve current problems,” Schaeuble said in Berlin. “Therefore we need to do the best we can on the basis of the existing treaties.”

ECB Oversight

EU lawmakers and national governments agreed on March 19 to a provisional deal to turn the Frankfurt-based ECB into the euro-area bank supervisor. Dijsselbloem said today that the ECB will need to review asset quality as soon as it takes up its new duties, noting that there is “still the risk of contamination between banks.”

The ECB has said if depositors are protected consistently across the euro zone, including guarantees for small accounts and preference for uninsured depositors over other types of unsecured creditors, further measures aren’t needed for now.

The current EU deposit-guarantee proposal “provides a harmonized framework and should help shore up confidence in national schemes,” said ECB Vice President Vitor Constancio in a March speech. “This means that a single European scheme is not an essential component of banking union in the short term.”

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net; Rebecca Christie in Brussels at rchristie4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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