Invited to meet in an ‘enlarged Eurogroup’ format by videoconference, the European Finance Ministers will give their initial reactions, on Tuesday 3 May, to the draft work programme on the completion of the Banking Union in the euro area that the President of the Eurogroup, Paschal Donohoe, has sent them (see EUROPE 12911/18).
Mr Donohoe is determined to move forward on a politically sensitive issue by setting the operational milestones and timetable for the establishment of a European Deposit Insurance Scheme (EDIS), the third pillar of the Banking Union alongside the single banking supervision and resolution.
“If we don’t do it now, it’s hard to imagine a better time”, an EU source said, on Friday 29 April, referring implicitly to the recent elections in Germany and France.
The result of an intensive consultation exercise at technical and political level, Mr Donohoe’s draft work programme attempts to strike a balance between diverging national interests. Some countries are more concerned with reducing financial risks, others are more concerned with sharing these risks. States hosting the headquarters of European banking groups want them to be able to manage their capital more freely within the Banking Union, while countries hosting only subsidiaries of large groups are asking for guarantees in case of default.
Mr Donohoe’s work programme envisages two phases, with the transition from the first to the second phase being conditional on a political ‘checkpoint’ based on an evaluation of the work done in the first phase. However, in order to agree to start work on the first phase, the Member States want to know where the second phase will lead and, therefore, to know the overall architecture of the Banking Union.
“The challenge is to convince Member States that the balance will remain and that no unpleasant events nor measures will come down the road”, said this senior European official.
If an agreement is reached in the Eurogroup before the summer, the European Commission will be asked to present a legislative package by the end of 2022 in four working areas:
(1) improving the management of a banking crisis (identification and better treatment of a failing bank, mobilisation of national deposit schemes in case of resolution) and revising the framework for State aid to financial institutions in times of crisis;
(2) deposit guarantee, through the possibility for a national scheme to provide liquidity in the form of loans to another national scheme in need through a future dedicated European Deposit Insurance Fund (EDIF) which would be progressively funded at 50% of the target set for national schemes;
(3) deepening the Single Market through better use of bank liquidity within a group, while setting the conditions and ‘liquidity waivers’ for this improved management;
(4) the treatment of sovereign debt, by increasing transparency on banks’ exposure to sovereign risk and by including the concentration of this risk in an investment portfolio as a criterion for determining the contributions of large banks to the future EDIF.
All these measures, which would be adopted within the framework of the current legislature, could come into force “at the beginning of 2025”, according to this source. Three years later, or by “2028”, a full assessment would be carried out in order to forge the political “ consensus” necessary to launch the second phase. An additional year for a decision could be considered if there is no consensus at the first attempt.
To form an opinion, “a wide range of criteria” would be used, the senior EU official said, expecting Member States to contribute their ideas on the issue. The EU official mentioned indicators to assess the level of risks in the financial system, the analysis of market conditions, the evolution of cross-border integration within the single banking market. It will be a “political meeting, not an exercise in ticking boxes”, the official stressed.
The second phase of the completion of the Banking Union would consist of the presentation of new legislative initiatives in the four areas mentioned above:
(1) new crisis management powers would be given to the Single Resolution Board (SRB), the European authority responsible for resolving large failing banks (see EUROPE 12922/15). An agreement could be drawn up so that the EDIF could, if necessary, request assistance from the Single Resolution Fund (SRF), the financial arm of the ‘resolution’ component of the Banking Union, knowing that it will eventually benefit from a credit line from the European Stability Mechanism (ESM), the euro area’s permanent rescue fund;
(2) EDIF funds could be endowed with a reinsurance function for national deposit guarantee schemes, a situation which would result in a share of risk pooling at European level;
(3) gradual measures would be introduced to facilitate intra-group capital management within the internal banking market;
(4) on the treatment of sovereign risk, a threshold for holding sovereign securities would be set above which a capital requirement would be introduced. But this obligation would not depend on the financial ratings assigned to sovereign issuers. Flexibility would also be introduced via an exemption clause allowing action in exceptional circumstances, according to the draft work programme that EUROPE has consulted.
At the end of the second phase, a new political meeting would take place to assess the need for further regulatory harmonisation.
see the work program of the president of the Eurogroup: https://aeur.eu/f/1G6 (Original version in French by Mathieu Bion)