September 11, 2015 / 6:07 PM / 5 years ago

EU, Germany head for clash over deposit insurance plan

BERLIN/LUXEMBOURG (Reuters) - The European Commission and Germany are set to clash on Saturday over a plan to guarantee bank deposits, which the EU sees as a necessary confidence-building step but Berlin considers an unfair pooling of risk.

European Commission President Jean-Claude Juncker addresses the European Parliament in Strasbourg, France, September 9, 2015. REUTERS/Vincent Kessler

Commission President Jean-Claude Juncker said in his state of the union speech to the European Parliament on Wednesday that he would soon make a concrete proposal on steps towards a European Deposit Insurance/Reinsurance Scheme.

This will represent the third pillar of a European banking union, an initiative designed to strengthen the financial sector in response to the global crisis of 2008.

The 19 countries sharing the euro have already agreed on a single bank supervisor and a Single Resolution Mechanism (SRM)for winding up failed banks, with the costs to be covered from a dedicated fund, filled by the banks themselves.

The deposit guarantee scheme is intended to boost savers’ confidence. Deposits in any one euro zone bank would be guaranteed up to 100,000 euros ($113,000) by all euro zone banks from contributions made to national guarantee schemes.

But Germany has long opposed it, fearing a political backlash to the idea that its accumulated funds could be used to guarantee the deposits of savers in other European countries, even though Germany could expect the same solidarity from others in Europe if its own funds proved insufficient.

Germany is also one of very few euro zone countries in which a deposit guarantee scheme already exists and is well funded.

Most other euro zone countries now only have government pledges. Should there be a problem with paying out deposits, the sovereign would raise the cash on the market.

A German government document prepared ahead of a euro zone finance ministers’ meeting on Saturday said that before such a scheme could be introduced, the two existing elements of the banking union should be fully implemented and tested.

The paper, obtained by Reuters, mentioned for example that countries should first start paying into the Single Resolution Fund and that the single bank supervisor should be moved out of the European Central Bank to ensure its full independence.

It also called for prior testing of a mechanism under which bank shareholders, bondholders and depositors share the cost of a bankruptcy.

This could only be done once all countries transpose into national laws the EU’s Bank Recovery and Resolution Directive, under which bank shareholders, junior and senior bondholders and even large depositors have to first lose money if a bank goes bust before any public money can be spent on saving it.

SOVEREIGN DEBT RESTRUCTURING

Berlin also wants to introduce a sovereign debt restructuring procedure that would help deal with cases when the public debt of a country becomes too large to manage.

“Resolution of potential future cases of sovereign debt overhang may be the way forward and needs to be further explored,” the paper said.

Among the options, the paper listed modifying bond contracts to deter free riding by “hold-out creditors” via collective action clauses; an automatic prolongation of government bonds when the euro zone bailout fund’s loans are granted; and a sustainability analysis by the IMF.

“To now start a discussion on further mutualisation of bank risks through a common deposit insurance or a European deposit reinsurance scheme is unacceptable,” the German paper said.

Germany, however, seems to be isolated as the deposit guarantee scheme is backed also by France and the European Central Bank, officials said. Luxembourg, which holds the rotating presidency of the EU, supports the idea.

Senior euro zone officials said German opposition to the plan might ease once it clearly states that no taxpayer money would be involved, that all financing would be provided by banks and any initial outlays would be later recouped.

The ministers will also discuss on Saturday if the single resolution fund (SRF), which is to cover the expenses of winding down a bank, should at the start get a credit line from the euro zone’s bailout fund, the ESM.

The SRF, which will start in 2016, will be financed from annual contributions from banks, but it will only reach its target size of 55 billion euros after seven years.

The Commission and the ECB argue that until then it should get bridge financing directly from the ESM in the form of an open credit line, similar to the credit line enjoyed by the Federal Deposit Insurance Corporation in the United States.

Germany and Finland oppose this idea, sticking to the initial agreement that the ESM should only lend to governments, not to institutions like the SRF. To allow it, euro zone countries would have to change the ESM treaty.

Writing by Jan Strupczewski; Editing by Mark Trevelyan

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