On Wednesday 11 October, the European Commission provided some new ideas to relaunch negotiations at the European Parliament and the Council of the EU to finalise, by 2018, Banking Union in the Eurozone through the creation of the European Deposit Insurance System (EDIS).
However, the European Commissioner for Financial Services, Valdis Dombrovskis, disagreed with comment, from the European Left in Parliament, amongst other sources, that in order to wrap up the dossier, the Commission had scaled down the initial ambition of its 2015 legislative proposal (see EUROPE 11437).
“The initial proposal is still on the table”: we are currently putting ideas to the European legislator to move discussions forward, with the aim of ending up with a “100% European system”, the Commissioner stressed. Our ultimate goal is a fully-fledged EDIS system that is capable of absorbing risks in a second phase, he added.
Having proposed the creation of a fully mutual EDIS from 2024, the Commission is now suggesting a more gradual build-up of a European system of bank deposit guarantees, with deposits guaranteed at a level of €100,000 in the EU. As we anticipated (see EUROPE 11878), EDIS would only provide the national regimes with additional liquidity up to 2021. In a second three-year phase, it would gradually cover any losses, intervening at a level of 30% in the first year.
Conditionality. According to the Commissioner, the problems in the discussions in Parliament and at the Council are mainly due to the treatment of legacy issues and the risk of moral hazard that the EDIS system would bring about. According to the project's detractors, such as Germany, the third pillar of Banking Union could implicitly allow certain banks to pile up risks, in full awareness that there was a European fund they could activate in the event of default.
Hence the Commission's suggestion of introducing new conditions to move from the first to the second stage of EDIS. In particular, the European institution would be responsible for authorising access to EDIS, on the basis of an asset quality review (AQR). It does not clarify whether this access would be on a case-by-case basis per bank or for a national regime as a whole.
In the legislative proposal on the table, moving from one phase to the next during the build-up of the EDIS system was only a “question of timetable”; now, it is reported to be based also on the quality of the assets held by banks, a source within the institution told us. The AQR would look at non-performing loans (NPLs), typically illiquid assets, according to the Commission's document, and also exposure to derivative financial products, Dombrovskis pledged, in answer to a question from a journalist.
The Commission is also keeping up the pressure on the member states to make progress in negotiations on creating a backstop for the Single Resolution Fund, the financial arm of the second pillar of Banking Union. It is also insisting on progress in negotiations on reducing financial risks, proposed in November 2016, and has announced measures for next spring to tackle NPL.
Mixed reactions in Parliament. Over on the Left of the European Parliament hemicycle, reactions were strong. Pervenche Berès (S&D, France) slammed what she described as the Commission's attempt to back pedal on its plans to set in place a true EDIS system. “This represents a serious blow to completing the Banking Union”, she said, adding that the European institution had lined up with the position of the Conservative right-wing.
In the opposite corner, Esther de Lange (EPP, Netherlands), Parliament's rapporteur on EDIS (see EUROPE 11664 and 11660), welcomed the Commission's initiative, describing the proposals as providing the necessary momentum to move the dossier out of deadlock. “I very much welcome the fact that the Commission has taken up my approach, which emphasises the need for prior risk reduction as a precondition for the sharing of losses”, she said. However, she feels that the Commission has not gone far enough in dealing with moral hazard, by calling for immediate recourse to EDIS in the event of a crisis instead of firstly mobilising only the national regimes. Furthermore, the EPP group argues that the conditions for moving from the first stage of the system to the second are not strict enough. (Original version in French by Mathieu Bion)