MNI SOURCES: Italy To Oppose Changes To Zero Risk Weightings

By David Thomas and Silvia Marchetti

     BRUSSELS/ROME(MNI) - Italy will oppose proposals for banks to hold capital

against sovereign bonds which are key to agreeing a eurozone-wide insurance

scheme for bank deposits, Italian and European officials told MNI.

     A substantial deposit insurance text will be thrashed out by working groups

focused on Bank Regulation, Solvency and Sovereign Exposure ahead of the

Eurogroup meeting of finance ministers in December, officials told MNI, speaking

after German Finance Minister Olaf Scholz declared support for the scheme in an

article in the Financial Times.

     Officials were optimistic for an agreement on the long-stalled deposit

insurance discussions, now that Germany has abandoned its long opposition to the

idea.

     "They will need a relatively concrete text by the December Eurogroup, not a

legal one, although to some extent it will almost need to be," one said.

     Scholz's proposal seems to paper over some of the more controversial

aspects of eurozone-wide deposit insurance, by opting for a 'lite' version with

member states relying on national insurance but providing cross-border liquidity

assistance if required.

     --ZERO RISK WEIGHTS

     The German minister said key conditions for deposit insurance would be

common insolvency procedures for banks and the imposition of capital

requirements on their holdings of sovereign bonds, which are currently rated as

risk-free.

     But an official in Italy, whose banks have large holdings of that country's

government bonds, dismissed Scholz's proposal, accusing him of purposely

insisting on an end to zero risk-weightings in the knowledge that it was a

condition other nations would be unable to agree to.

     "It's the usual German rhetoric. Nice words, but the truth is Berlin is

still against risk and burden sharing," the Italian official said.

     "If zero-risk is abolished Italian banks would see their capital

significantly drop while this would be less of a problem for German ones," the

official said, adding that "ending the zero-risk weighting for sovereign bonds

could destabilize bond markets across Europe."

     The Italian government has been rallying support among other southern

countries, such as Spain, Portugal and Greece to oppose changes to sovereign

risk weighting, the official said.

     European officials will probably leave sovereign exposure, as well as one

or two other difficult points, out of the draft text, in order for ministers to

discuss the matter in December, officials in Brussels said.

     Once agreed by the ministers the EU December summit could give the nod to

start political discussions at the start of next year.

     Scholz would make a full presentation at the Eurogroup tomorrow, including

a timeline, officials said.

     A European Banking Federation spokesman welcomed Scholz's proposal.

     "Finalising this European project is essential to open the door for next

steps in financial integration and to create a truly European banking sector

that can be attractive to investors worldwide," Raymond Frenken told MNI.

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

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