Jeroen Dijsselbloem

Eurogroup Chief Puts Banks on Notice

Dijsselblom_ap
Jeroen Dijsselbloem, Dutch finance minister and chair of the Eurogroup finance ministers, has big plans for regulating Europe's banks.
  • Why it matters

    Why it matters

    Tougher regulation is designed to make banks safer, but bankers complain that too many rules could also make them unprofitable.

  • Facts

    Facts

    • The European Commission plans that by 2024, a European-wide deposit insurance scheme will guarantee all covered deposits in the euro zone.
    • Germany is resisting the E.U.’s banking sector risk-sharing moves, fearing that its depositors or taxpayers could end up footing the bill for banking failures in other countries.
    • Although all Eurogroup countries are already required to create a fully funded national deposit guarantee scheme, Germany is the only country that currently has one in place.
  • Audio

    Audio

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Jeroen Dijsselbloem is not worried that European banks have been given too tough a ride since the 2008 financial crisis.

For the president of the Eurogroup, a committee of finance ministers from the 19 nations that use the euro currency, the work of making banks safe enough to avoid another financial crisis is not yet complete.

Instead of easing off the gas pedal, Mr. Dijsselbloem, in an interview with Handelsblatt, signaled a fresh regulatory drive when his home country, the Netherlands, takes over the European Union’s rotating presidency in the first half of next year.

“The completion of the banking union will be one priority of the Dutch presidency in the first half of next year,” said Mr. Dijsselbloem.

Mr. Dijsselbleom laid out a list of priorities that might cause unease among the top echelons of management in Europe’s biggest banks, many of which have complained that regulation in the euro zone has already reached a fever pitch. A number of Europe’s top bankers have warned that their profitability is being undermined by the onslaught of new rules imposed by Europe’s supervisors.

The Eurogroup chief made clear that ensuring financial stability, by reducing the biggest remaining risks in the banks’ balance sheets, takes priority. The way to do it, according to Mr. Dijsselbloem, is to finish the job of harmonizing bank rules across the continent. Only then can the European Union think about sharing more bank risks across countries.

“Member states won’t accept to share the risks if these are uncontrollable.”

Jeroen Dijsselbloem,, Eurogroup chief, Dutch finance minister

Mr. Dijsselbloem wears many hats these days. In addition to being chair of the Eurogroup, he is the Netherlands’ finance minister and also chairs the European Stability Mechanism – the agency endowed with hundreds of billions of euros in funds to come to the aid of E.U. governments in crisis. The European Stability Mechanism, or ESM, is the key institution involved in lending money to Greece.

For a six-month period starting in January, Mr. Dijsselbloem will be wearing another hat. He will be chairing the Ecofin Council, which comprises the finance ministers of all 28 European Union member states. It is in this second, wider function that the Social Democratic politician wants to tackle problems in the banks’ balance sheets.

In his interview, Mr. Dijsselbloem laid out a number of key financial priorities for the coming year. They include establishing a binding leverage ratio, a new regulatory tool that measures a bank’s capital compared to its total assets.

He also called for a common E.U. mechanism to restructure sovereign debt if government’s run into trouble, as well as homogeneous bank insolvency laws across the euro-zone countries and the removal of deferred tax assets from banks’ balance sheets.

For Mr. Dijsselbloem, there is a clear order to how these rafts of measures must be ticked off. The first task is to reduce the risks in the banks’ balance sheets. Only once that job is done should the European Union consider steps to share the risks that might come from an unforeseen bank collapse.

Mr. Dijsselbloem made clear that this also goes for the creation of a European-wide deposit insurance fund – a common pot of money, paid into by European banks, that would be used to bail out depositors if a bank plunges into bankruptcy.

“The European deposit insurance scheme cannot be successful if it does not go along with risk reduction in the banking sector,” Mr. Dijsselbloem told Handelsblatt. “Risk sharing has to be combined with risk reduction,” he said.

The European Commission, the E.U. executive arm, last month set out its own proposals for what common deposit insurance – similar to the Federal Deposit Insurance Corporation in the United States – would look like. It was met with stiff resistance – above all from Germany.

The plan is that by 2024, the E.U.-wide fund would completely take over the guaranteeing of all covered deposits in the euro zone, even though national funds would still exist.

“The European deposit insurance scheme cannot be successful if it does not go along with risk reduction in the banking sector.”

Jeroen Dijsselbloem

The European Union already guarantees deposits of up to €100,000 in banks, but it is currently national governments that are required to fund a bailout. While all euro-zone countries are already required to create a national deposit guarantee scheme, funded by banks, Germany is the only country that currently has one in place.

Under the plan, bailing out depositors in the case of a bank failure would fall mainly on national funds during the first three years of the transition period, 2017, 2018 and 2019. If there was not enough cash, then national governments would have to foot the bill. After that, the E.U. fund would begin to take over.

Germany is leading opposition to the E.U.’s banking sector risk-sharing moves, fearing that its depositors or taxpayers could end up footing the bill for banking failures in other countries.

Mr. Dijsselbloem signaled understanding for Germany’s concerns. He called the Commission’s proposals “a good basis for discussion,” but acknowledged that many other steps needed to be shore up banks before a full E.U.-wide fund was put in place.

“Member states won’t accept to share the risks if these are uncontrollable,” Mr. Dijsselbloem said. “We have to use the transition period until the full deposit insurance in 2024 to reduce the risks in the balance sheets of the banks,” he added.

Among his other top priorities are introducing a risk-weighting scheme for the sovereign-bond holdings of banks. Many E.U. financial firms are invested heavily in the government bonds of their own country. Mr. Dijsselbloem’s goal is to reduce the concentration level of sovereigns of one member state in the banks’ balance sheets.

At the moment, in contrast to other securities, government bonds held in a bank portfolio do not have to be backed with equity capital. In other words, banks can hold as much government debt as they want. If another acute debt crisis were to strike a European state, Mr. Dijsselbloem warned it could drag banks down once again. He wants to ensure that this possibility is eliminated.

On top of that, Mr. Dijsselbloem wants to dictate a maximum leverage ratio for the banks. A new regulatory tool that has gained importance since the financial crisis, the leverage ratio is currently reported by banks but is not binding.

The European Commission hopes to make a minimum leverage ratio binding by 2018, but whether this really happens, remains to be seen. Europe’s biggest banks have been mounting a vigorous opposition to the new rule.

Mr. Dijsselbloem also took aim at deferred taxes. He said that tax losses carried forward make up a significant part of the core capital in many southern European banks. These “deferred tax assets” can be realized only if the bank makes profits, from which they can settle the tax.

The European Union’s banking regulators have criticized this practice. Mr. Dijsselbloem said he see only one solution – removing deferred tax assets from core capital.

During his E.U. presidency, the Eurogroup chief also wants to make progress on unifying capital requirements in the European Union.

“There are more than 120 national discretions from the capital requirements directive. They have to be removed,” said Mr. Dijsselbloem. He also spoke in favor of harmonizing insolvency laws governing banks in the European Union.

“There are big differences among the national insolvency legislations,” Mr. Dijsselbloem said. “This caused problems in the banks in Greece and Cyprus.”

 

Ruth Berschens is Handelsblatt’s bureau chief in Brussels. Christopher Cermak of Handelsblatt Global Edition contributed to this story. To contact the authors: berschens@handelsblatt.com  and cermak@handelsblatt.com 

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