For Brussels, it has long been seen as the final piece of the puzzle to unify the European Union’s banking system. For Berlin and Frankfurt, it was seen as one step too many on the road to mutualizing the continent’s debts – and making German taxpayers pay for past mistakes of others.
Welcome to the long-stalled fight over an EU-wide deposit insurance scheme, an effort to create a common pot to bail out depositors of banks that fail across the European Union. It’s a fight in which Germany seems to have won the first battle – and perhaps even the war.
After two years of pushing for a €43 billion common fund to be adopted by 2024, the European Commission now appears ready to break the deadlock by basically given up on the idea for the time being. The EU’s executive arm, in a new draft seen by Handelsblatt, says a common fund could be introduced in even slower steps, and only once banks have proven they have done a better job of winding down their debts of the past.
Much of the fight has been less about the future and more about the so-called "legacy debts" of the past.
The debate over common deposit insurance isn’t really any different from the broader debate – stoked by French President Emmanuel Macron last week – over the European Union’s future. Mr. Macron is proposing a common euro zone budget and finance minister. This may be a step too far for thrifty Germans and some other EU countries who fear they will wind up paying into a common pot that benefits their neighbors’ bad spending habits.
At its core, the question is whether EU countries in general, and those in the 19-nation euro zone in particular, should be responsible for each other in good times and bad. And so it goes with a common deposit insurance, too. Wolfgang Schäuble, Germany’s outgoing finance minister, has repeatedly warned that such a common fund will set the wrong incentives for European banks and governments, which will have less reason to keep their own bad lending practices in check. Much of the fight has been less about the future and more about the so-called “legacy debts” of the past.
Those debts remain massive: About €865 billion in non-performing loans are sitting on the balance sheets of the 130 European financial firms monitored by the European Central Bank, albeit down from nearly €1 trillion at the start of 2016. Much of this debt is in southern Europe, where bad banks and weak economies have been caught in a nasty feedback loop. Some of the debts are also in Germany, where northern banks as well as Commerzbank in particular were saddled with bad shipping loans.
It’s this mountain of debt that has led Germany to resist moves to mutualize deposit insurance. The fear is that if Italy’s banking system goes belly-up, Germany could be on the hook for the rescue. Supporters argue that’s exactly the point: the euro zone can’t work as a single currency area if each country is responsible for its own debt load. Only when a full banking union is in place will the European Union be equipped to prevent another banking crisis, EU Commission President Jean-Claude Juncker has said.
And yet, in the interests of breaking the deadlock, it looks like the European Commission has finally yielded the point to Berlin, and pushed the prospects for a pan-European insurance scheme into the distant future. Instead of a common fund, the commission’s vice president, Valdis Dombrovskis, will next week propose a “first phase” of establishing credit lines between national insurance schemes. In other words, if Italy’s banks fail en masse and the country’s deposit scheme runs out of funds to compensate depositors, they could borrow from Germany’s fund but would have to pay the money back.
Only at a later date – a second phase – would the national funds be liable for each other, and only in a final third phase would there be a full EU deposit insurance fund, which the Commission hopes can one day be built into a €43 billion war chest to deal with bank failures across the bloc – similar to the Federal Deposit Insurance Corporation in the United States. Moving from one phase to the next would depend on progress made in winding down bad debts. In a further concession to Berlin, no date will be set for phase two. It will depend on actual progress made in reducing bad loans.
That’s a compromise that Germany and its northern European allies may be willing to live with, though sources say Berlin first wants to see a full plan for how to wind down European banking debts before agreeing. Those details will be part of Mr. Dombrovskis’s proposal next week. “Eschewing an automatic transition from phase one to phase two would be welcome,” EU parliamentarian Esther de Lanke, who has been responsible for trying to get the measure through the EU legislature, told Handelsblatt. She added that a credit line, though not much, would at least encourage the national funds to work together more closely during the first phase.
Germany’s banks remain skeptical. Unlike many other EU countries, Germany’s banking system is made up of thousands of smaller savings and cooperative banks that hold most of the nation’s deposits. It’s these banks, which have set up their own network of deposit guarantees, that are loath to have to pay into an EU fund. “The institutional guarantees are the backbone of the cooperative banking group. They will never be made available,” said Uwe Fröhlich, president of Germany’s association of cooperative banks.
Ms. de Lange has heard the complaint many times. She said that ensuring the “coexistence of national systems” within an EU deposit insurance scheme will go a long way to breaking the deadlock. That’s a demand the European Commission seems prepared to concede as well. In short, anything to rescue plans for an EU-wide system from the ash heap.
Ruth Berschens is Handelsblatt’s Brussels bureau chief. Jan Hildebrand is a senior political reporter for Handelsblatt in Berlin. Andreas Kröner is a banking correspondent for Handelsblatt in Frankfurt. Christopher Cermak is an editor for Handelsblatt Global currently in Washington DC. To contact the authors: firstname.lastname@example.org and email@example.com