• EU to study sovereign-debt risk in buildup to March report
  • Ireland, Italy back EU plan as Finland, Netherlands skeptical

German Finance Minister Wolfgang Schaeuble lashed out at plans for joint European deposit insurance, saying the proposal threatens central-bank independence and may be illegal under European Union treaties.

Schaeuble’s comments on Tuesday pitted him against officials from the European Central Bank, Italy and Ireland during a public discussion that underscored disputes holding up shared deposit backing, including how to address the risks of government bonds on banks’ balance sheets.

The ECB “strongly” supports the European Commission’s plan to introduce common deposit insurance over eight years, ECB Vice President Vitor Constancio said. Schaeuble countered that sovereign risk weighs down banks in too many nations, which shouldn’t benefit from more joint insurance until that’s been addressed. In addition, the ECB is breaching the barrier between monetary policy and its new bank-oversight goals, he said.

“There must be a clear Chinese wall or at least a division by primary law between banking supervision and monetary policy,” said Schaeuble, who called for a treaty change on the ECB’s role and questioned whether current treaties allow deposit insurance as envisaged.

As European banks are generally allowed to treat sovereign debt on their balance sheets as free of default risk, any move to add risk weighting or limit such holdings could cause shocks. In Tuesday’s debate, Constancio called for working globally to address the sovereign-risk question to avoid market disruptions. The European Commission’s proposal would apply to euro-area countries and any others that want to join.

Schaeuble’s calls for risk reduction won more allies than his legal questions about the EU proposal. Finnish Finance Minister Alexander Stubb said his view of the legal issues was “a little bit softer” than Schaeuble’s, though risks needed to be addressed before deposit insurance moves ahead. Dutch Finance Minister Jeroen Dijsselbloem called for concrete plans on how to limit banking risks.

A working group will study the issue and report back to finance ministers in March. Stubb, Dijsselbloem and others called for proposals that would address sovereign-debt risk on bank balance sheets as well as national carve-outs from European Union banking standards.

Among supporters of quicker action, Italian Finance Minister Pier Carlo Padoan said EU Financial Service Commissioner Jonathan Hill’s proposal already represents compromise and Ireland’s Michael Noonan said the plan moves slower than needed.

“I would prefer a full mutualization could happen at an earlier date,” Noonan said. “It is important to ensure that savings are equally protected in all member states, thus further weakening the link between the banks and the sovereigns.”

Heeding Schaeuble

If Germany prevails in its view that the deposit insurance plan doesn’t work under EU law, the euro area could turn to an agreement between individual governments, Dijsselbloem said.

“If Schaeuble says something, people are always listening very carefully to him,” he said. “You know how it went with the resolution fund, this was dealt with via an intergovernmental agreement. This could be route now.”

Schaeuble’s proposals to “sequence” work on deposit insurance and reducing bank risk won’t protect the EU from another financial crisis, Greek Finance Minister Euclid Tsakalotos said. He said the EU proposal might contain a local shock but wouldn’t counter a cross-border crisis.

Schaeuble more conservative sequencing “will not work for a systemic shock,” Tsakalotos said.

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