MNI EXCLUSIVE: German Resistance To EZ Deposit Insurance Eases

By David Thomas

     BRUSSELS (MNI) - German political resistance to a pan-eurozone bank deposit

insurance scheme appears to be easing as the need for consolidation in the

country's banking sector becomes more urgent, officials and politicians told

MNI.

     "The German government is ready to talk seriously after years of

obstruction," said European Parliament Econ Committee Member Sven Giegold, a

German Green.

     "That doesn't change the fact that agreement is not going to be easy."

     Progress on the topic - key for EU Banking Union and for the resilience of

the eurozone as a whole - has been held back by opposition from the likes of

Bundesbank President Jens Weidmann, who has made ending zero-risk weightings for

sovereign bonds on bank balance sheets a key quid-pro-quo for moving ahead on

the issue.

     But German proposals for EDIS schemes which would avoid full mutualisation

and so ease German voters' fears that they will be left on the hook for costly

bank failures on the EU's problem periphery are garnering support for some kind

of eurozone-level deposit insurance, particularly as problems in Germany's own

banking sector become more apparent.

     Eurozone finance ministers are working on a transitional path, and a

roadmap towards political negotiation, for a "steady state" banking union,

including EDIS, with technical work concluding by December.

     "We need to find a solution. Clearly, deposit insurance is positive for

banks and for financial stability. One of the more important open questions, as

always, is who pays in the event of a market or a bank failure," says Andreas

Dombret, former Bundesbank board member, who recently organised a conference at

Goethe University in Frankfurt focused on finding a solution to the issue.

     --REINSURANCE PROPOSAL

     Dombret recognises the problem of very high bad loan levels in some

eurozone states, but insists a bloc-wide solution needs to be found to the

pressing problems facing the sector:

     "A European solution is obviously desirable, not least because without one

we can't embark on the much-needed consolidation of the EU banking sector in

order to reduce overcapacity in the industry."

     Dombret supports a reinsurance proposal put forward by five German

economics professors but wants to make it compulsory rather than voluntary.

     The idea would shorten what would otherwise be a long wait for eurozone

banks to make further significant reductions in their risk profile.

     The reinsurance idea has also won over Giegold and other Green party

politicians who want some kind of EDIS, even if not full mutualisation, which he

said "would kill the institutional protection schemes of cooperative banks and

the savings banks."

     But there are still senior German politicians who want a further reduction

in risk across the eurozone before any scheme is adopted.

     "I agree that the debate has evolved a bit. Even the Commission has moved

away from the idea of fully-fledged risk mutualisation and the ideas being

discussed now are a bit more digestible," said Markus Ferber MEP (CSU/EPP).

     "But I want to be very clear, I am personally not convinced that we really

need EDIS right now and I definitely want to see further risk reduction before

we progress on any sort of harmonisation," he said, adding that any reinsurance

scheme cannot be unconditional and must be compatible with existing

institutional protection schemes.

     While non-performing loan stocks have fallen recently in states with weaker

banking systems, absolute levels remain high and much of the improvement may

have been cyclical, Ferber said.

     The regulatory classification of banks' holdings of sovereign bonds as

risk-free must also end, he said. A so-called "doom loop" linking the health of

peripheral banks' to that of their governments via such holdings was at the

heart of the eurozone debt crisis in the earlier part of this decade.

     In a 2017 report to the Econ Committee, Nicolas Veron of thinktank Bruegel

proposed making banks hold more capital against excessively concentrated

sovereign bond holdings. Giegold said he would favour "clear-cut concentration

caps that would apply to ownership of newly-issued government bonds."

     One ECB source suggested that reductions in concentration might have to

await the creation of a European safe asset.

     "Without that, we would have a situation where German banks were forced to

massively diversify out of bunds and into Italian bonds and Italian banks the

reverse," the source said.

     The search for a safe asset which meets with the approval of market

participants is still continuing.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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