EU ministers reach key agreement to unlock Banking Union file

German Minister of Finance Olaf Scholz (L) and French Finance minister Bruno Le Maire during the Economic and Financial Affairs Council in Brussels. [Stephanie Lecocq/EPA]

Member states have reached an agreement on a package of measures aimed at reducing risk in the banking industry. The political consensus built, upon a joint proposal by the French and German finance ministers, paves the way for a deepened reform of the Economic and Monetary Union.

“Dear colleagues, we have it!” Vladislav Goranov, Bulgarian Minister for Finance, revealed after reaching an agreement on a set of measures to improve risk reduction in the Banking Union during an Ecofin meeting today.

“This package is a key deliverable in the risk reduction in the banking sector,” said Vladis Dombrovskis, Vice-President of the Commission in charge of the Euro, Social Dialogue, Financial Stability, Financial Services and Capital Markets Union.

With this decision the EU will apply international standards agreed following the 2007-08 financial crisis to European legislation.  Its implementation will make European banks more resilient in case of markets shocks, according to the EU.

In particular, the proposal introduces a binding leverage ratio of 3% for all banks, to prevent them from excessively increasing leverage. This figure will go up for global systemically important banks.

It also comprises a ‘total loss-absorbing capacity’ of at least 8% of their balance sheet, which larger banks will have to comply with.  This measure aims to strengthen risk-sensitive capital requirements for banks that trade largely in securities and derivatives, so as to ensure they hold sufficient assets to stand a period of market turbulences.

The Commission and member states are committed to continue with the work towards more risk sharing measures before June’s meeting, including the common backstop for the Single Resolution Fund and a common guarantee scheme for deposits. This element is one of the most controversial aspects of the package.

The focus on risk reduction over risk sharing has led to some frictions between member states. Italy and Greece, who defend development of both measures and the logic that they should go hand in hand, abstained from the vote. “We expect that in June the EU will do significant breakthrough,” Italian Finance Minister Pier Carlo Padoan stressed.

The presidency of the Council will now have to start negotiations with the European Parliament.

Italy in the spotlight

There have been three attempts in the last six months to adopt this package but only now member states found the consensus.

A possible hostile government in Italy and its contagion effect in the markets might have to some extent forced the EU to speed up in its work to strengthen the Banking Union.

“There is no direct link between the political process in Italy and what we managed to achieve,” Vladislav Goranov, Bulgarian Minister for Finance, claimed.

Germany’s Olaf Scholz was cautious on how the new Italian government might affect the set of reforms the EU needs to work on in the near future.

“The designated prime minister of Italy, after his talk to the president said that Italy will follow the regulations and rules we have in the European Union. I think if someone is giving his hand, you should take it,” Scholz stated.

A step closer to EMU reform

The political agreement reached today is based on a consensus built by the German and French governments over the past few weeks. A consensus they showcased by giving a joint press conference after the Ecofin meeting.

France and Germany have been working “hand in hand” on the banking package. “A week ago we sat down and drafted a text,” Bruno Le Maire, French Minister for Finance said to the press. That text was the basis for today’s agreement, Le Maire revealed.

“This package is a good, strong and fair package,” Le Maire defended, and will be “a major step in risk reductions.” The deal will allow “getting progress in all the other questions related of the Banking Union,” German Finance Minister Olaf Scholz highlighted.

Thus, the agreement is also a political milestone as it paves the way for the deepening of the Economic and Monetary Union reform. “This is a very important moment for the further development of the European Union,” Scholz pointed out. “It has created the political momentum we needed”, stressed Le Maire.

The ministers will now work together towards a proposal which they will present to Chancellor Angela Merkel and President Emmanuel Macron, ahead of the European Council Summit in June. For the reform of the EMU, “it is now or never,”  the French minister warned.

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