German Federal Finance Minister Olaf Scholz (SPD) is abandoning his blockade of the European deposit insurance system.
In an eight-page non-paper on the Banking Union he proposes a “European Reinsurance System” for bank deposits which is to be set up in addition to the national deposit guarantee schemes with contributions from credit institutions.
Losses exceeding both the national and the European guarantee fund would have to be borne by the Member State concerned. In November 2015, the European Commission proposed the full mutualisation of national deposit guarantee schemes in order to prevent national bank runs and to spread the risk across Europe.
This would have jeopardised the institutional protection systems of savings and cooperative banks.
The position paper from the German Federal Ministry of Finance links European deposit reinsurance with preconditions for risk reduction in the Banking Union: government bonds should no longer be treated risk-free in bank balance sheets and insolvency law for non-systemically relevant banks should be harmonised at European level. Scholz wants to put a stop to profit shifting by introducing a common corporate tax base and a minimum tax rate on corporate profits.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group, told this website: “It is very welcome that the German Finance Minister, after a long blockade, has presented a proposal for the banking union. The end of the German government’s destructive blockade in Europe was long overdue. However: Scholz’s proposal is immature and the approval by the CDU/CSU is highly questionable. Scholz’s assertiveness will be tested by whether or not the CDU/CSU will follow suit. Germany’s European policy cannot afford another flop.
A European deposit reinsurance scheme can prevent capital flight and preserve proven national bank security schemes at the same time. The basic idea of a European deposit guarantee is good, but Scholz’s version of it is not good enough. Scholz thinks too little in European and too much in national terms. Scholz does not want the European reinsurance to be secured at European level, but by national taxpayers. In a serious banking crisis, national taxpayers would have to continue to bear the losses rather than European banks. Without a common European liability for banks, the doom loop of banks and nation states will continue. In order to avoid false incentives at national and European level, the contributions to the guarantee systems must be strictly measured by the risk of the individual bank and not only by the deposits secured. Subsidies of sound small banks to high-risk banks must be prevented.
Scholz’s entire package of measures on the Banking Union breathes too much of the national spirit. If the capital requirements for sovereign bonds depends on the creditworthiness of the states, this is of benefit above all to German banks and the German Finance Minister. Suddenly the German finance ministry takes note of the strong home bias of German banks towards domestic sovereign risks and does not want to push the banks to Europeanize. It would be more solid and more European to impose a hard exposure limit on all banks for holding government bonds in relation to the bank’s equity. Similarly, the proposal to harmonise bankruptcy law for banks is too short-sighted. The real problem are the different national regimes for restructuring and recovering defaulted loans. A European insolvency law requires common procedures and harmonised consumer protection. The fact that Scholz wants to restrict the free flow of liquidity and capital within banking groups in the event of a crisis mirrors his nationally conceived deposit reinsurance scheme, but contradicts the European Banking Union. Unfortunately, Scholz is not giving up his national reservations about taxation either. A common corporate tax base is only effective against profit shifting if profits and losses are also consolidated across borders. This is the only way to achieve an effective reduction in bureaucracy for European businesses in the area of taxation. Scholz, however, rejects the consolidation of corporate taxes.”