European Central Bank President Mario Draghi has urged eurozone member states to complete the banking union with a European Deposit Insurance Scheme, noting the “substantial” reduction of risks in the banks’ balance sheets and the benefits of risk-sharing.
Speaking at the European Parliament’s Committee on Economic and Monetary Affairs on Monday (9 July), Draghi referred to the stalemate in the negotiations as a group of countries led by Germany oppose the mutualisation of risks unless banks clear up their books.
“We should not be held back by the distinction between risk reduction and risk sharing,” he told MEPs, underlining that the two concepts are complementary.
The Italian central banker argued that the risk reduction requested by Berlin and almost a dozen other countries to progress on EDIS has already taken place.
To illustrate the “substantial” risk reduction, he recalled that the Common Equity Tier 1 ratios of significant banks, “a key indicator of bank health”, are now 67% higher than when the financial crisis started a decade ago.
When it comes to the non-performing loans, particularly high in Greece, Cyprus and Italy, Draghi commented that the developments addressing these ‘toxic’ assets “are going in the right direction but the effort isn’t finished yet”.
Besides these specific countries, the average ratio of NPLs in relation to the total amount of loans in the eurozone is below 5%.
In addition to the progress made on risk reduction, the ECB chief argued in favour of setting up EDIS in parallel with the banks bolstering their balance sheets, given that risk-sharing “greatly helps” risk reduction.
Draghi said a pan-European guarantee for savers would contribute to financial and economic stability as it would avoid “the risk of destabilising self-fulfilling prophecies” of bank runs, and would increase the “effectiveness of monetary policy as it would reduce financial fragmentation.
The European Commission has also insisted over the past months on progressing with risk-sharing and risk reduction in parallel.
Draghi also shared the Commission’s views on the governance of the backstop to resolve failing banks, the only block of the banking union within reach.
However, countries disagree over the process to disburse funds to orderly resolve teetering financial entities. Although an agreement was expected for June, EU leaders postponed it for the end of this year.
Draghi said that the backstop, around €60 billion coming from the European Stability Mechanism, “should be made operational as soon as possible and be given swift and efficient decision-making procedures.”
However, Berlin and other governments want to ensure a heavy political oversight of the backstop, involving not only finance ministers but also national parliaments.
EU officials warned that such a governance structure would slow down the decision-making process needed to contain financial instability by disbursing funds in times of winding down banks, which could happen overnight.
While banking union remains a top priority for European institutions, Draghi also touched upon long-term ideas of bolstering the economic and monetary union with new fiscal instruments.
As on previous occasions, he told MEPs that the eurozone would benefit from a common stabilisation function.
“Such an instrument could provide macroeconomic support in the event of euro area-wide recessions, thereby preserving convergence, supporting stabilising national policies and allowing monetary policy to operate effectively,” he explained.
But he said that this instrument should not “undermine” the governments’ incentives to balance their public accounts or reform their economies.
A European unemployment insurance
Asked about a European Unemployment Insurance Scheme, one of the ideas included in the Franco-German proposal to bolster the EMU, Draghi said that “it is the right thing to do”.
Expressing his personal view, as the ECB’s governing council has not discussed the topic yet, he spoke in favour of the idea for a “variety of reasons”, saying it would combine the stabilisation function and social protection and enhance the labour mobility, while noting that it would be compatible with the monetary union.
He agreed that it would need to be properly designed, which is “not simple”, and said that it should take into account the existing unemployment insurance systems.
But Draghi insisted that the proposal would push the economic and monetary union “exactly in the right direction”.