EU ministers to set out on long road to complete banking union

By Christian Kraemer and Jan Strupczewski

BERLIN/BRUSSELS – European Union finance ministers will take a step towards completing the bloc’s banking union on Tuesday by agreeing on a long roadmap of when and how to agree on the still missing elements, a draft statement of the ministers showed.

The EU’s banking union, launched at the height of the sovereign debt crisis in 2012 to calm financial markets, has already led to the creation of a single bank supervisor for key EU banks and a set of rules to wind them down if they go bust.

Still missing is a European Deposit Insurance Scheme (EDIS) that would help prevent bank runs by guaranteeing all deposits up to 100,000 euros in EU countries.

Talks on sharing responsibility for deposits across the 27-nation EU, or just the 19 countries sharing the euro, have dragged on for years because the idea does not sit well with several northern European countries, led by Germany.

But the recent changes of government in Berlin and the Hague as well as the unprecedented challenges of the COVID pandemic, climate change and the uncertainty for households and business caused by the war in Ukraine helped create positive momentum.

“Now more than ever, we need to continue this common path to building shared prosperity and resilience in Europe in a changing world,” the draft statement, seen by Reuters, said.

Progress on EDIS has been difficult because some countries have made their agreement to the scheme conditional on first fixing related issues that influence the overall stability of banks and therefore the likelihood of EDIS ever being used.

Among the contentious issues has been the size of bond portfolios a single sovereign a bank can hold and if money from bank subsidiaries can be moved across borders to shore up a troubled parent.

LONGROADAHEAD

The ministers will agree on Tuesday to move ahead in two stages, each spread over many years. The process will start with the European Commission presenting by the end of 2022 proposals for EU laws that would deal with the first stage.

These would include measures to harmonise the criteria and the triggers for determining failing banks and the gradual buildup of a European deposit fund that would co-exist with national deposit guarantee funds and lend to them if they run short.

The Commission is also to propose a law on the use of liquidity in large cross-border banking groups.

Finally, it will propose a law on the transparency of bond holdings with a clause that the higher the concentration of bonds of a single sovereign, the higher contributions a bank would have to pay to the common European deposit insurance.

The ministers hope that this whole package can go through the EU legislative track by mid-2024 and come into force from the start of 2025, though it might take longer.

Three years after the package enters into force, EU governments would then make a political assessment of whether they are ready to move to the second stage of the plan, a senior euro zone official involved in the talks said.

If there is no consensus, the assessment would be repeated annually until it is reached.

Once there is agreement, the second stage, which could also take years to complete, would entail transferring the remaining discretionary powers in bank crisis management from national authorities to the European Single Resolution Board.

This also would include a support arrangement under which the single resolution fund for winding down banks and the EU deposit guarantee fund would mutually help each other if needed.

The second stage would also mean that the European deposit insurance scheme would gradually start sharing risks with national funds by acting as a re-insurer of national schemes, rather than just offering them loans in an emergency.

At this stage cross-border banking groups also would move to sharing capital across borders rather than just liquidity and banks would face a gradual introduction of non-risk weighted concentration charges for very high concentrations of sovereign holdings in their balance sheets, though with an escape clause for exceptional circumstances.