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German eurozone banking plan wins cautious backing

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Via Financial Times

European financial policymakers and supervisors have given a cautious welcome to proposals from the German finance minister Olaf Scholz to create a common deposit reinsurance scheme for the single currency zone.

But there was concern among some conservatives in Angela Merkel’s Christian Democratic Union, who said they had been blindsided by Mr Scholz’s intervention and warned it could destabilise the “grand coalition” government in Berlin.

“We still need to erect the banking union’s third pillar: European deposit insurance,” said Andrea Enria, head of the ECB’s Single Supervisory Mechanism, which oversees the eurozone’s biggest banks. “We hope to see signs that there is a little bit more openness to move ahead in this project.”

Writing in the Financial Times, Mr Scholz offered hope of a breakthrough in plans to create a full eurozone banking union by ending Berlin’s opposition to a common scheme to protect savers’ deposits. He said it was “no small step for a German finance minister”.

However, he placed a caveat on his proposals with calls for restrictions on banks’ sovereign debt holdings and non-performing loans, demands that are bound to spark concern in EU member states with weaker finances or fragile banking sectors.

There is likely to be strong opposition from within the German government, too. Mr Scholz is a social democrat, and his CDU coalition partners are strongly resistant to the concept of a eurozone deposit insurance scheme.

A CDU adviser said Mr Scholz’s paper had come as a “complete surprise” to the Christian Democrats’ parliamentary group and would destabilise a coalition already roiled by disagreements over pension reform and foreign policy.

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The adviser said the CDU was still insisting that a common deposit insurance scheme could only be introduced once non-performing loans on bank balance sheets had been reduced. “These processes must happen in sequence, not in parallel,” he said.

Asked whether Mr Scholz’s opinion piece in the FT had been co-ordinated with Ms Merkel, her spokesman Steffen Seibert said it was merely a “contribution to a discussion”. “It will feed into the discussion both internationally and within the government,” he said.

However Mr Enria, who was speaking at an ECB conference on Wednesday, welcomed Mr Scholz’s apparent change of heart, saying: “Depositors must be sure that their money is well protected no matter whether it is deposited with a bank in France, Italy, Greece or Germany.”

German banks have been vocal opponents of a eurozone deposit insurance scheme. However, Hans-Walter Peters, head of the Association of German Banks, welcomed Mr Scholz’s proposals on Wednesday, saying: “The fact that the German ministry of finance is distancing itself from the European Commission’s previous proposal for a communitisation of deposit guarantee schemes is an important step in the right direction.”

Olivier Guersent, the European Commission’s director-general for financial stability, said Mr Scholz’s intervention was “a bold move and very welcome”. But he said his ideas were “unambitious vis-à-vis what the commission think is necessary”.

Mr Scholz, he said, was proposing a reinsurance scheme rather than a fully mutualised system of guaranteeing deposits, and his ideas came with “a lot of conditions”. However, speaking at the ECB event, he added that Mr Scholz’s paper “goes in the area in which we can work”.

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German economists were also positive. Clemens Fuest, head of the influential Ifo Institute, a think-tank, said the “combination of more risk-sharing with more market discipline [is] overall the right approach”. “The current relatively stable situation is the right time for reforms of eurozone institutions,” he added.

The ECB has long called on politicians to complete banking union by agreeing a European deposit insurance scheme that would help to reduce the fragmentation of the zone’s banking market. Yet the project has been frustrated by opposition from Germany and other countries that worry it risks a bailout of weaker banks in southern European countries by richer countries in the north.

“For every stone that is brought to finishing the still unfinished house of banking union, I would say: ‘Thank you’,” said Yves Mersch, an ECB executive board member. He added that the new European Commission president, Ursula von der Leyen, was “not shying away from” changing the EU treaty and new banking union harmonisation could be included in that.

Mr Enria said the ECB’s push to make banks safer “hinges on completing the banking union”. He added that “only a European deposit insurance scheme can decouple this protection from the financial firepower of national schemes”.

The SSM head explained that a common deposit insurance scheme would “justify the removal” of national barriers to the free flow of bank liquidity and capital across borders in the eurozone that were introduced after the 2008 financial crisis.

“Our banks cannot yet consider the banking union as their domestic market, as a truly single jurisdiction,” he said, adding that while political agreement would be “difficult” and take time to implement, “we cannot accept that the current segmentation of the market remains unaddressed”.

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José María Roldán, head of the Spanish Banking Association, said Mr Scholz’s proposals were “a clear positive,” adding: “It’s an important signal.”

Katharina Utermöhl, senior economist at German insurer Allianz, said Mr Scholz’s plan “could help revitalise a half-finished project”. But she added that “a swift breakthrough in negotiations remains unlikely” because of the probable need for more concessions by Berlin “particularly given the tough conditions attached to Scholz’s proposal” that are likely to face “resistance” from other countries.

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