Europe Proposes Eight-Year Move to Joint Deposit Insurance

  • New bank-funded system phased in slowly to assuage Germany
  • EU's Hill seeks balance of risk reduction and risk sharing

The European Union plans to create a common, bank-funded deposit-insurance system starting in 2017, trying to overcome fierce German opposition to the plan with steps to make lenders safer.

The European Commission, the EU’s executive arm, presented its European Deposit Insurance Scheme in Strasbourg, France, on Tuesday. The new system will be phased in to 2024, allowing EU countries to put their own deposit-insurance programs in order and addressing Germany’s concerns about risk-pooling. Banks’ contributions to the EU system will be adjusted for the risks they pose to financial stability.

Jonathan Hill, the EU’s financial-services chief, also vowed to press ahead with legislation forcing banks to raise their loss-absorbing capacity and to reduce exposure to their home country’s government bonds. He promised to push lagging member states to implement the bloc’s new banking rules.

“The whole essence of what I am trying to do is have an approach which sensibly balances risk-reduction measures and risk-sharing measures,” Hill told reporters. “We set out a range of measures to help reduce risk in the system of the sort people have been discussing for a long time. People will see this is a genuine attempt to balance the need to mutualize risk with need to reduce risk.”

Juncker’s Plan

Commission President Jean-Claude Juncker announced the plan in his state-of-the-union address on Sept. 9, prompting opposition by German Finance Minister Wolfgang Schaeuble only days later. Lawmakers in the Bundestag, Germany’s lower house of parliament, ratcheted up the pressure on Merkel earlier this month when they approved a resolution that urged the government not to agree to Juncker’s deposit-insurance initiative.

Hill sought to head off these concerns, and to drive home the need for a common system, in an article published in the German newspaper Handelsblatt before Tuesday’s announcement.

“No national scheme could be strong enough to resist a major local shock, but a single euro-area scheme will be stronger than the sum of its parts,” Hill wrote. “Greater mutualization of risk will only happen gradually over time and needs to be accompanied by measures to reduce risks so that there is less risk to share in the first place.”

Uphill Battle

Demonstrating the uphill battle Juncker and Hill face, associations of savings and mutual banks lined up on Tuesday to reiterate their opposition. Those banks, some of which are owned by municipalities, are a dominant part of the German and Austrian banking systems and well connected politically.

“The EU Commission is playing with savers’ trust,” said Roman Glaser, president of a group representing cooperative banks in Germany’s industrial southwest. “A European deposit insurance would tear down the walls that protect national banking markets from the encroachment of financial-market turbulence and leave bank customers in Germany to pay the price.”

Three Stages

The EU plan will be introduced in three stages, starting with a three-year “reinsurance approach” that would require countries to exhaust national deposit-insurance coffers before seeking common funds. In the next four years, the plan enters a “co-insurance stage,” in which contributions rise and turn into a full European insurance 2024.

To reduce moral hazard and assuage fears that German savers fund other countries’ weak banks, contributions to the system will vary to reach the overall average of 0.8 percent of insured deposits, or roughly 43 billion euros ($46 billion), the commission said.

Hill said that the mutualization of risk the joint deposit insurance entails is balanced by the EU’s measures to make banks more resilient. Those efforts will be complemented next year by new laws forcing the biggest banks to have loss-absorbing capacity as prescribed by the Financial Stability Board. The commission will also “re-consider” how to reduce banks’ exposure to their home states through government bond holdings.

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