Lagarde urges European leaders to agree on common guarantee for savings

German chancellor Angela Merkel (R) speaks to Director of IMF Christine Lagarde during a press conference with the presidencies and heads of International Economic and Financial Organizations after a joint meeting at the Chancellerey in Berlin, Germany, 11 June 2018. [Omer Messinger/EPA/EFE]

The Managing Director of the International Monetary Fund, Christine Lagarde, called on eurozone leaders on Thursday (28 March) to complete the banking union by reaching an agreement on the European Deposit Insurance Scheme (EDIS).

“I urge euro area leaders to reignite the discussion, to negotiate in good faith and make the difficult compromises, to unlock the full potential of the banking union,” Lagarde said in a conference hosted by Bank of France, as quoted by Reuters.

A common guarantee to protect deposits up to €100,000 is the outstanding pillar of Europe’s banking union, which already includes single supervision and resolution of systemic banks.

Progress has been minimal, mostly because of Germany’s opposition to the new instrument.

Lagarde said that “we can find ways to resolve our legitimate national concerns.”

Following various rounds of technical discussions, EDIS will be discussed by finance ministers in their informal meeting on 5 April in Bucharest.

German chancellor Angela Merkel succeeded in excluding any reference to EDIS in the eurozone summit conclusions of December 2018, despite the strong push of some countries to complete the banking union.

Leaders wrap up year-long euro reform with face-saving package

EU leaders concluded on Friday (14 December) a year-long discussion to bolster the eurozone by approving extra money to resolve failing banks and additional powers for the European Stability Mechanism, the EU’s rescue fund.

Berlin has refused to mutualise depositors’ risks unless some banks further reduce their level of non-performing loans (NPLs).

‘Bad loans’ held by eurozone banks have been decreasing in recent years. In 2017, they were already slightly below the world average of 3.74% as NPLs held by EU banks in relation to other loans was 3.7%.

However, supervisors pointed out that the level is still worrying in countries like Greece.

In light of the progress made cleaning up banks’s balance sheets, the IMF, the ECB, the European Commission, Eurogroup presidency and a large majority of member states are in favour of gradually building a common deposit insurance.

Eurozone countries agreed last December to explore possible ways at technical level to reconcile the opposing positions.

EU reaches limited agreement to bolster economic and monetary union 

EU finance ministers concluded a deal on Tuesday (4 December) to bolster the region with new tools to save ailing banks and member states but postponed Europe-wide instruments to protect depositors or stabilise national economies.

Sovereign debt

European officials said on Thursday that the bone of contention is not only the level of ‘bad loans’ but also the volume of public debt held by some banks and the sovereign risk of their home countries.

As a result, progress on the common guarantee for depositors is linked to the discussion on regulatory treatment of public debt.

The current zero-risk weight of sovereign debt has been reviewed at international level by the Basel Committee, but no agreement was reached.

Commission passes the ball on sovereign debt rules

European Commission Vice-President Valdis Dombrovskis said on Wednesday (7 March) that he does not intend to amend the regulatory treatment of sovereign debt held by banks following inconclusive discussions at international level.

As a result, the Commission decided not to put forward any proposal. This issue has been also discussed by member states at Council’s expert group.

European sources said that there is a “deadlock” between the regulatory treatment of sovereign debt and EDIS.

In order to overcome this gridlock, negotiators are proposing to look at what kind of common deposit insurance European countries would like to have in ten years’ time and translate that into concrete proposals, including on sovereign debt.

“We are looking at completing the banking union more broadly,” a European official said.

“It doesn’t mean that we will reach an agreement in June” but it is delivering “some results,” the official added.

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