Europe takes a backward step on banking union

As part of its plan to complete the euro zone’s so-called banking union, the European Commission has presented a new proposal for collectively insuring bank deposits. Such a scheme is badly needed — but the new idea falls short. By leaving too much risk with national governments, it fails to address a critical weakness of the system.
The commission is responding to the concerns of Germany and others, which fear being saddled with the consequences of their partners’ financial mismanagement. That fear is understandable, but the banking union won’t work without closer collaboration and sharing of risk. The EU needs to think again.
The commission has long seen a joint guarantee on deposits up to 100,000 euros as the missing third pillar of the banking union. Governments have already empowered the European Central Bank to supervise the continent’s largest lenders; they’ve also established a common framework for winding down banks in trouble. Still needed is a joint safety net for deposits.
Two years ago, the commission proposed a European Deposit Insurance Scheme (EDIS) to gradually replace existing national schemes. During an initial phase, this would have given governments access to common funds — once they’d drawn down their own resources, and up to a certain level. Full risk-sharing wasn’t due to start until 2024.
If anything, this original plan was itself too timid — but it never came into force. To assuage Germany’s concerns, the commission’s new proposal is even weaker. During the phase-in period, it would provide only temporary liquidity support to national funds. This support would have to be paid back, so losses would not be pooled.
This goes against the very idea of a banking union — that financial risks ought to be managed and shared across euro area. Banks in financially stable countries will continue to attract deposits more cheaply; rival foreign lenders will face higher funding costs, since creditors will expect to be on the hook in the event of a crisis. This isn’t the banking union Europe keeps proclaiming, and it leaves the system vulnerable.
The commission would be wise to return to its earlier scheme. At the same time, all governments should act faster and more forcefully to deal with their banks’ nonperforming loans. More effective EU-wide regulation plus a genuine banking union is the right way to strengthen
Europe’s financial system.

—Bloomberg