Brussels, 03/06/2016 (Agence Europe) - The Dutch Presidency of the Council of the EU favours the idea of getting the ball rolling for an intergovernmental agreement that would form the basis of part of the European deposit insurance scheme (EDIS), the third arm of banking union in the eurozone.
“Considering the divergence of member states' positions in respect of the option to set up an intergovernmental conference to deal with the deposit insurance funding, the Presidency holds the view that - similarly to the negotiations on the single resolution mechanism - the possibility of having a well-framed intergovernmental agreement should be explored”, the Dutch Presidency said in a draft progress report on technical talks on the EDIS proposal, which will be submitted to the ECOFIN Council on Friday 17 June. The report calls for the adoption of a roadmap on reducing and sharing financial risks.
In November 2015, the Commission suggested completing banking union by starting work on the EDIS. This foresees the creation in three stages of a European deposit insurance scheme that will be fully pooled by 2024 and have around €43 billion in its coffers (see EUROPE 11437).
Germany is challenging the internal market legal basis (Article 114 of the Treaty) for the European Commission's legislative proposal (see EUROPE 11448). It did the same thing during the drawing up of the resolution arm of banking union, where it won agreement to draw up an intergovernmental agreement for the transition period while the Single Resolution Fund is being built up. Quizzed about this, the Council's legal service justifies the choice of Article 114 while also paving the way for the development of an intergovernmental agreement for measures not harmonised in the EDIS proposal (see EUROPE 11532). The Commission is convinced that no intergovernmental agreement is needed, EU Financial Services Commissioner Jonathan Hill said in Amsterdam in early May. France is not taking a strong stand on this, saying it is prepared to find a solution that works.
The Dutch Presidency's progress report identifies two other key issues raised by the member states. The first is the lack of any ex ante assessment by the Commission of the impact the EDIS will have on banking. Germany and Finland have submitted a joint document criticising the absence of a prior assessment and consultation that the Commission should have provided. They say this contravenes the principles of the Better Regulation approach the European institutions are meant to follow. The Dutch Presidency invites the Commission to submit additional quantitative analyses “including on possible alternatives” to the EDIS.
At the technical level, the Dutch Presidency of the Council is focusing work on the last phase, (“steady state”) of the EDIS, as proposed by the Commission. It says that if agreement can be reached on the steady state and all the related horizontal issues, such as governance, then this would make it easier to reach agreement on the intermediate stages. The Presidency says that clarifications are needed on the EDIS' scope of application concerning how third country bank branches in the EU are dealt with, and financial entities that are not banks but which contribute to member states' savings guarantee schemes. While still putting saver protection first, it has filled out the procedure to be followed when a national scheme does not meet its obligations under the EDIS. Although “fundamental” talks will be needed on ex ante contributions to the EDIS, the Presidency says that the member states recommend harmonisation within banking union of measures concerning payment procedures for contributions and the extent of deposits covered by the guarantee.
Risk reduction work carried out in parallel. The third crucial question is the connection between work to share and reduce risks in banking. The Dutch Presidency has produced a separate document on this, covering all work to boost banking union, be it by reducing or sharing financial risks. The 1 June version of this document, which EUROPE has seen, identifies the challenges that remain to be ironed out on the regulatory front at both eurozone and EU level.
In terms of risk reduction, a number of subjects are mentioned. Some member states stress the importance of a “uniform approach” to bail-ins. They say draft legislation should be considered to establish a clearer hierarchy among bank creditors required to contribute if a bank goes under. When it comes to the exemptions and discretion allowed to the member states under prudential bank regulations (CRR-CRD), the Commission could unveil a proposal later this year to improve liquidity and intragroup capital flows. Another legislative proposal will be unveiled before the end of the year to introduce minimum harmonisation rules for insolvency systems under the union of capital markets.
Agreement is still far off when it comes to the question of the way sovereign risk is to be dealt with by legislation. Based on options presented by the Presidency, such as introducing a weighted risk and/or cap on exposure (see EUROPE 11533), several member states want the existing framework to be strengthened, which does not foresee any bank capital requirements to cover the holding of public debt. Other countries, however, recommend caution because of the potential negative consequences of imprudent revision of the current framework, while many countries feel that work here should go hand-in-hand with work at international level. (Original version in French by Mathieu Bion)