Italy says German banking union plans will harm eurozone banks

Via Financial Times

Italy has warned that a German proposal to complete the EU’s banking union would harm the competitiveness of the bloc’s banks, in comments heralding complex negotiations over Europe’s most ambitious integration project since the creation of the single currency.

Speaking on the margins of a gathering of eurozone finance ministers in Brussels, Roberto Gualtieri took issue with a key part of bank regulation plans laid out by his German counterpart this week in the Financial Times.

German proposals to remove regulatory incentives for banks to buy their governments’ debt would create a global “unlevel playing field” by disadvantaging European banks, Italy’s finance minister told reporters. Rome’s position on the matter was “far” from that of Berlin, he added.

The remarks highlight the divisions over Olaf Scholz’s grand bargain to complete the banking union, a project devised during the sovereign debt crisis of the euro area to boost financial stability by centralising supervision and crisis management of banks. 

His proposals included dropping longstanding German opposition to the last big missing piece of banking union — the creation of a common EU system to protect bank savers — while making the offer conditional on a range of tough policy demands that have raised hackles in other member states.

“The deadlock has to end,” wrote Mr Scholz, whose country’s opposition to a deposit reinsurance mechanism had stalled talks for years. 

One of Mr Scholz’s demands is that banks face capital requirements when they buy up bonds issued by the bloc’s national governments. Under EU current rules, this sovereign debt is treated as a risk-free asset, allowing banks to buy it without having to increase their loss-absorbing capital.

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Germany has long argued that the risk-free status gives banks the wrong incentives. But southern European governments such as Italy, which fear that it would drive up their debt costs and threaten financial stability, have opposed any change.

Mr Scholz suggested in his plans that the legal change to introduce capital requirements would be gradual and would only apply to bond purchases above a certain threshold.

While saluting his German counterpart’s gesture on banking union as “important” and “positive”, Mr Gualtieri criticised the sovereign debt plans. 

“We consider that this is a measure that would have a negative impact,” he said, adding that the step should not be a precondition for completing banking union.

The sovereign debt rules are not the only part of the plans that are controversial. Another feature of the Scholz proposals aims to make it easier for banks with subsidiaries in different countries to manage their capital and liquidity.

But smaller countries worry this could mean subsidiaries on their territory being left vulnerable in a crisis. Greater harmonisation of tax rates is also contentious. 

Pierre Moscovici, the EU’s economy commissioner, said on Thursday evening that the Scholz proposals nonetheless marked a “breakthrough” in Europe’s seven-year-old debate over banking union. 

Mario Centeno, president of the eurogroup, was equally positive after Thursday’s talks among EU ministers, where banking union and the Scholz plan were discussed. He said that the German proposals had helped to create a “new mood in the room”.

“We can be more optimistic after this meeting than ever before,” said Mr Centeno.

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His intention is that governments will agree a roadmap next month on how to complete the banking union project, although he acknowledged that “this is still a difficult discussion and we will need to move step by step.”