MNI POLICY: Euro Banking Union Needs Deposit Insurance: Nouy

By Luke Heighton

     FRANKFURT (MNI) - The European Deposit Insurance Scheme should be

introduced now to protect the "fragile" progress made in stabilizing the bloc's

banking sector, the head of the ECB's banking watchdog said today.

     Daniele Nouy warned against doing "too little, too late" in the area of

risk sharing, and said further banking consolidation was needed ahead of the

next financial crisis.

     Nouy, who steps down as chair of the supervisory board of the SSM at the

end of this year, said supervision had reduced risks in the banking sector, but

that differing national approaches to dealing with failing banks continue to

cause problems.

     Here are key points from her speech in Berlin:

     -- Nouy cautioned against complacency, and said that risks in the banking

sector are already low enough to justify implementing European deposit insurance

as soon as possible.

     -- However, the fragmented nature of the regulatory framework, compounded

by uncertainty over the hierarchy of liabilities, has produced differing

national approaches to dealing with failing banks, Nouy said. This "is likely to

trigger overreaction by market participants, further reducing the banking

sector's resilience in times of crisis."

     -- She criticized ring-fencing of national banking sectors, and said large

exposure waivers on intragroup lending are in the hands of the national

legislators, who have no incentive to authorize them. "Supervisors should be

able to grant cross-border waivers for solvency, liquidity and large exposures.

They should be able to do so whenever it makes sense, and with appropriate

conditions attached."

     -- She called for the creation of a "truly European banking market - a

market that is closely integrated but still comprises different kinds of banks.

Such a market would have room for all types of banks: small and large,

specialized and universal, listed as well as mutual and cooperative."

     -- Consolidation could be one answer to the problem of banks' lack of

profitability, she said. "Cross-border mergers would also create a few large

European banks - let us call them "European champions" - which could then

successfully compete on the global stage".

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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