On 11 October, Sven Giegold (member of the European Parliament’s ECON Committee) reacted to the European Commission’s (EC) communication on the completion of the Banking Union (BU) in a Post on his blog.
In particular, Giegold criticises the proposed interim steps to be taken in order to pass from the 1st to the 2nd phase of the European Deposit Insurance Scheme (EDIS): an Asset Quality Review (AQR) to be undertaken by central banks.
The German MEP describes this transitory procedure as letting ‘the fox guard the henhouse’, since the fulfillment of the proposed condition to initiate the second EDIS phase will be subject to an EC decision.
In addition, Giegold says that concrete proposals to reduce risks for European savers should be considered, such as:
- Banks should hold equity from European sovereigns;
- Higher leverage ratio should be required for financial institutions with a high-risk profile; or
- Internal bank models should have a limited risk underestimation.
Last, but most relevant, Giegold highlights the danger of Non-Performing Loans (NPL) and the fact that stricter banking regulations should be introduced (such as the reformed Minimum Capital Requirements) in order to reduce either the risk of credit defaults or the next shockwave.
EDIS is one of the three proposed pillars of the BU. Along with an ‘integrated mechanism for crisis management’ (the Single Resolution Mechanism), and a European supervisory authority (the Single Supervision Mechanism), EDIS stands for the ‘common level of deposit protection’.
Meant to back-up national Deposit Guarantee Schemes (DGS) in times of banking crises the EDIS is designed to be achieved in three phases:
- Re-insurance phase: EDIS provides a liquidity cover for DGS (30% in 2019; 60% in 2020; 90% in 2021);
- Co-insurance phase: besides full liquidity cover, the EDIS will also, gradually, provide a loss cover for DGS;
- Full-insurance: EDIS will provide a complete system or liquidity and loss cover for national DGS.
What Giegold criticises is that the conditional transition towards co-insurance (which involves an AQR of NPL and Level III Assets, followed by a set of measures to be taken by defaulting banks, such as active portfolio reductions) will be ascertained by the EC itself, which should not be the case.
European depositors should benefit from a high standard of savings protection which, according to Giegold, ‘is only possible through a European reinsurance’.
Read here:
- Sven Giegold’s article ‘Banking Union: Real risk reduction instead of old wine in new bottles’.
- EC Communication on the Completing the Banking Union.
- Initial Commission proposal to establish a European Deposit Insurance Scheme (EDIS):
- Single Resolution Mechanism Regulation (explained here).
- Single Supervision Mechanism Regulation (explained here).
- Deposit Guarantee Schemes Directive.
- The Five Presidents’ Report on Completing the Economic and Monetary Union.