Brussels to revive campaign for bank deposit guarantee scheme

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Brussels will try to breathe fresh life into its decade-long campaign to create a common deposit insurance scheme for EU banks as part of efforts to encourage more cross-border mergers in the sector.

The European Commission will call for new ideas on how to create a unified scheme to guarantee bank deposits of up to €100,000 across the region when it publishes a consultation on potential reforms of the sector in the coming weeks, EU officials have told the FT.

This is the first step in the Commission’s plan to publish a wide-ranging report later this year on the competitiveness of EU banks, examining why lenders in the region have lost ground to Wall Street rivals and what can be done to reverse the decline.

Europe’s failure to unify its fragmented system of national bank deposit insurance schemes is seen as one of the main reasons why its lenders struggle to expand across borders within the bloc through mergers or organic growth.

The Commission first made proposals to create a European Deposit Insurance Scheme in 2015. But negotiations fell through following resistance from countries, including Germany, which argued that a common insurance scheme would result in moral hazard by encouraging riskier behaviour by banks, and opposition from Italy to limiting the amount of sovereign debt that national banks can hold.

Countries such as Germany insist a common deposit guarantee scheme must be accompanied by limits on home government debt ownership to avoid countries pushing their lenders to buy more of their sovereign bonds, knowing the risk is shared across the continent.

The Commission has decided there is little chance of reviving the 2015 proposal. But officials hope that by throwing open the debate to new ideas they can break the political deadlock.

“We will also consult on possible new ideas and approaches to EDIS,” said a senior EU official. “We know we can’t revamp the 2015 proposal but we need fresh thinking. We have to look at whether deposits are well protected and what is missing.”

Previous ideas on how to do this have included a phased approach that slowly shifts towards a full loss-sharing mechanism between countries. Another proposal would have capped banks’ exposure to their domestic sovereign debt to reduce the “doom loop” between governments and lenders.

Michael Theurer, an executive board member at Germany’s Bundesbank, seemed to soften his country’s position by writing in the FT last month that an agreement to restrict banks’ domestic sovereign debt exposures “could help lay the groundwork for completing the banking union”.

Nicolas Véron, an economist at Brussels think-tank Bruegel, said finding a way to restrict banks’ exposure to their home government debt — something long opposed by heavily indebted countries such as Italy — was crucial to reaching agreement on common deposit insurance.

“The Commission and everybody in the member states is aware that the current system is fragile and not very good,” said Véron. “The question is whether it is possible to break this deadlock, and the Commission seems to think it is possible to work on it in a way that wasn’t after the 2022 fiasco, when talks on EDIS between Eurozone finance ministers collapsed.”

European bank executives have long complained about the fragmentation of EU banking markets that traps hundreds of billions of euros in capital and liquidity behind national barriers, preventing it from moving freely in the bloc. The ECB has estimated that €225bn of bank capital and €250bn of bank liquidity are trapped by such national restrictions. 

A task force set up by the European Central Bank to examine ideas for improving banking supervision said a common deposit insurance scheme was one of its recommendations for tackling the fragmentation of the EU banking market.

“Relative to other large markets, EU banks face a competitive disadvantage owing to the lack of scale that results from an incomplete single market,” the task force said.

Recently, there have been signs of a pick-up in cross-border EU banking deals, such as French lender BPCE’s €6.4bn move last year on Portugal’s Novo Banco. But big deals can often stir up political opposition, as with UniCredit’s investment in Germany’s Commerzbank.