Eurozone finance ministers met virtually via video conference on Tuesday (3 May) to discuss new measures to integrate the European banking system, proposed by Irish Finance Minister and Eurogroup President Paschal Donohoe.
The new push comes after years of slow progress on banking union and after EU heads of state called on Eurogroup finance ministers to agree on a plan to complete the union ahead of the next Eurozone summit in June.
“I’m obviously and certainly not saying that our differences have been settled,” Donohoe told a news conference, recalling the past years of stagnation on the issue. However, he argued that it didn’t make much sense to postpone the integration further into the future.
“The plan has been formulated to reflect the views and concerns that have been raised by Member States during my many months of engagement with them,” Donohoe said.
The draft work plan circulated by the President of the Eurogroup provides for new measures in four areas of work, namely in the area of crisis management, protection of depositors, the single market for banking services and diversification of sovereign assets.
To improve crisis management, the work plan proposes to continue the harmonization of national deposit guarantee schemes and national bank insolvency procedures across Europe and to finalize its review of the state aid framework for banks.
Deposit guarantee and sovereign exposure
A long lamented risk to financial stability in Europe is the lack of a European deposit guarantee scheme to make the European banking market more resilient to bank insolvencies.
Eurozone finance ministers have instructed the Commission to propose a common European deposit guarantee fund. According to the work plan, this fund should be constituted by the gradual pooling of national deposit guarantee schemes.
A European deposit guarantee fund has long been a contentious issue, so the work plan suggests that the European deposit guarantee fund should only provide repayable loans to national deposit guarantee schemes instead of directly insuring European deposits.
Another weakness of the European banking system is the high exposure of banks to the sovereign risks of their country of origin. If, for example, the Italian state were deemed to be at risk of defaulting on its debt, markets would quickly determine that Italian banks are also at risk of default, since banks often hold a large portion of their country’s government debt. ‘origin, especially in Italy. This could trigger a vicious circle, further weakening state finances.
To counter this specific risk, Donohoe’s work plan suggests “increasing the monitoring and transparency of banks’ sovereign holdings”, for example through stress testing. Furthermore, it proposes to include concentrated sovereign holdings as an element determining the size of the contribution to the European deposit insurance fund.
According to Donohoe, Germany and Italy have requested more work on contentious issues of the European deposit insurance fund and sovereign asset exposures.
European Stability Mechanism (ESM) Director General Klaus Regling, who also attended the Eurogroup meeting, backed the new push for a banking union, calling for shrinking national banking markets.
“More cross-border banking would increase risk sharing,” said the soon-to-be-replaced ESM chief, saying increased risk sharing would increase the stability and resilience of the European banking market.
As the work plan is already considered to incorporate the views of various eurozone finance ministers, Donohoe argued that “the room for maneuver is very small”.
“Any significant change to the content of the policy would make an agreement more difficult to reach,” he told reporters after the virtual meeting.
The Eurogroup president’s aim is to reach an agreement by June so that the Commission can propose the necessary legislative changes before the end of 2022.
[Edited by Alice Taylor]