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Making the banking sector safer and active: the EU’s new proposal

Eugene Eteris, RSU/BC, Riga, 13.10.2017.Print version
European Commission for three years has been working on strengthening the single currency and confidence in the euro. Its new Communication is about the completion of the Banking Union - expected by 2018-19- revealing new proposals and pragmatic ideas (e.g. to align risk reduction and risk sharing), which would make it easier to reach an agreement among the EU states on the Banking Union’s issues.

In 2012 the Commission proposed a Banking Union that would place the banking sector on a sounder footing and restore confidence in the euro. The Banking Union is based on stronger prudential requirements for banks and consists of bank supervision, rules for managing failing banks as well as improved protection for depositors. The first two pillars were achieved with the establishment of the Single Supervisory Mechanism (SSM) and of the Single Resolution Mechanism (SRM).

 

However, a common system for deposit protection has not yet been established. The Commission made further steps and put forward a proposal for a European Deposit Insurance Scheme (EDIS) in November 2015. But the Banking Union can only deliver its full potential and provide all the tools needed to deal with future crises if all its elements are fully in place.


Strengthening the single currency

The Commission, since the start of its mandate, emphasised the need to strengthen the single currency in the face of unforeseen circumstances and challenges; completing the Banking Union is essential for reaching that goal as it will lead to the Economic and Monetary Union that can better withstand and absorb any future crises.

 

The euro area countries already have benefited from the two pillars of Banking Union: the Single Supervision and the Single Resolution Mechanism; together, they make the member states’ banking sector safer and help to ensure that taxpayers are not paying for banking crises. However, as long as financial ties between banks and their sovereigns remain as close as they presently are, there is still “unfinished business”.

 

Commission’s reform will promote deeper financial integration, which further reduces the links between banks and sovereigns. Thanks to more risk-sharing via private markets, taxpayers will be better protected from having to shoulder the burden of bank failures. Beside, more integration is also helping to give consumers cheaper and more diverse options for financial services.


And to make these tangible benefits more accessible, the Commission made a proposal to reduce charges on cross-border banking transactions in all EU currencies.


Commission’s pragmatic ideas

Both the Council and the European Parliament reaffirmed in 2016 the importance of completing the Banking Union. However, the progress is slow and clear engagement from the EU’s co-legislators is needed to reach an agreement by the end of 2019.

 

Commission has presented pragmatic ideas to speed up the process by advancing in parallel on risk-reduction and risk-sharing measures:

 

First, swiftly adopt the comprehensive risk-reduction measures (presented in the Commission’s November 2016 Banking Package). These measures will strengthen and adjust the existing rules to complete the post-crisis regulatory agenda for banks.

 

Second, further reduce the high levels of non-performing loans in certain parts of the banking sector; bad loans hinder banks from providing new credit to the real economy, and limit economic growth. The Commission has for years been working with the EU states’ supervisors and banks to reduce the share of non- performing loans in the EU. The progress was clear: since mid-2014, this share has been reduced from 6.7% to 4.5%; but the need is there to accelerate this trend and prevent the stock from building up again. The Commission is working to implement the Council's July 2017Action Plan on non-performing loans; in 2018 a package of measures on this basis is expected.

 

Third, to reach consensus on a European Deposit Insurance Scheme, or EDIS, which is the Commission proposed EDIS as a Europe-wide system building on the existing Deposit Guarantee Scheme directive. EDIS would collect funds from banks -and only banks - to build up a strong Europe-wide deposit guarantee of €100 000 per depositor. This would help break the bank-sovereign link by making deposit protection independent of a bank's location. The 2015 proposal was based on a gradual phase-in with clear safeguards to avoid moral hazard, and this proposal stays on the table. But in two years it has not really advanced as the positions of the Council and the European Parliament are far apart. Therefore, the Commission is putting forward some ideas to unblock discussions, by introducing EDIS in a more gradual manner:

 

a) one suggestion would be to limit EDIS in its first phase to providing loans to depleted national schemes. These loans would later have to be fully paid back and EDIS would not cover losses. It would focus on providing liquidity, to ensure that depositors maintain quick access to their savings.

b) another idea would be to make the second phase of EDIS conditional on an asset quality review, i.e. a “health-check” of member states’ banks to confirm that legacy issues from the crisis have been dealt with. Here, the EU-wide strategy to reduce non-performing loans would play an important role. These elements might allow co-legislators to further reduce moral hazard while still fulfilling the ambition of the original proposal.

 

Fourth, to insist on the Banking Union to become operational as quickly as possible; the idea was already agreed nearly 4 years ago to guarantee the credibility of the Single Resolution Mechanism. This is possible in case of private creditors have born losses; besides, it would be fiscally neutral, with all disbursements required to be fully reimbursed by contributions from banks. Eurogroup agreed in October 2017 that the European Stability Mechanism could provide that backstop for the single resolution fund. The Commission follow’ this up in December 2017 package on deepening Europe's Economic and Monetary Union.

 

Fifth, exploring pragmatic solutions for helping banks diversify their holdings of sovereign bonds; this would further weaken the bank-sovereign links. This is done in order to closely following the work of the European Systemic Risk Board on Sovereign Bond Backed Securities.

 

This would be a product created by market participants, which banks could choose to hold.

 

Finally, the proposals on the Single Supervisory Mechanism; it gives an overall positive assessment of the application of the SSM Regulation, and the first years of the ECB acting in its supervisory capacity. At the current juncture, the Commission does not consider it necessary to amend the SSM Regulation. Taken together, these measures form an ambitious but realistic path to completing Banking Union.

 

Bottom-line: the new proposals are “giving food for thoughts” for the EU’s co-legislators, i.e. the Parliament and the Council; reaching a comprehensive deal on the Banking Union is essential for the future of the Economic and Monetary Union and for a strong financial system that fully supports jobs and growth and reduces risks for taxpayers.

 

Source: Commission Communication: http://europa.eu/rapid/press-release_SPEECH-17-3883_en.htm?locale=en

See also: “Commission calls for the completion of all parts of the Banking Union by 2018” in: http://europa.eu/rapid/press-release_IP-17-3721_en.htm?locale=en and “Completing the Banking Union by 2018” in:  

http://europa.eu/rapid/press-release_MEMO-17-3722_en.htm?locale=en






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