Bundesbank's Buch Wants Reform Before Banking Union Third Pillar

  • Euro-area deposit insurance part of step-by-step approach
  • Liability and control of risks should be at the same level

Europe’s nascent banking union will get its final pillar of joint deposit insurance only when governments take further steps to raise control of the financial system to the euro-area level, Bundesbank Vice President Claudia Buch said.

“There are some preconditions that you have to have in place before you go into full-fledged European deposit insurance,” Buch said in an interview with Bloomberg Television in Frankfurt on Thursday. “That’s basically because we’re currently still in the situation where national policies have an important impact on the riskiness of bank balance sheets. I think we deal with those issues first.”

Seeking since the sovereign debt crisis to strengthen the institutions underpinning the single currency, European leaders have built a so-called banking union consisting of joint supervision, joint bank resolution and -- in theory -- joint deposit insurance. While the first two pillars have been created, the third has repeatedly been deferred by politicians wary of assuming liability for financial mistakes in other countries.

German Vote

“Now we’re in a sequenced approach where basically deposit insurance comes at the end,” Buch said. “Maybe that’s also helping the political support.”

Germany’s parliament approved a resolution this month urging the government not to agree to a deposit-insurance initiative put forward by the European Commission, which seeks to make progress on the matter by the end of the year. Germany’s Finance Minister, Wolfgang Schaeuble, has said a common deposit guarantee will have to wait until financial-stability measures already on the books, such as a joint fund to wind down failing banks, are fully implemented.

“We’ve also taken the decision that we’re going to have a single resolution fund, which in a stepwise fashion will be filled through the national resolution funds,” Buch said.

Buch, responsible for financial-stability policies at the German central bank, said it will be consistent to have deposit insurance at the European level.

“But we’re not there yet,” she said. “For me it’s really a matter of whether you have liability for certain risks and the control of those risks. You want to have that at the same level.”

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