Dombrovskis adds pressure to adopt deposit guarantee scheme

Dombrovskis adds pressure to adopt deposit guarantee scheme

By Jorge Valero

Amid persistent doubts over some pockets of the banking system, European Commission Vice-President Valdis Dombrovskis, urged reluctant member states to accept the EU proposal to set up a common deposit guarantee scheme.

“The completion of the banking union is our first task”, he said in a conference today (19 May).

“An important cornerstone, the European deposit insurance system, is still ahead of us,” he added.

The European deposit guarantee scheme is the third pillar of the banking union, together with the single supervisory and resolution mechanisms.

It is seen as a crucial block to shield the European financial system against external shocks by protecting its weak spots with a common insurance.

But Germany and a few other countries oppose any risk-sharing of the national banking systems until member states clean up their struggling banks.

“These measures need to go hand in hand with further measures to reduce risks,” Dombrovskis conceded today.

Almost ten years after the collapse of the subprime mortgage system in the US triggered a global financial crisis, European banks are still loaded with bad loans inherited from the bubble period.

The high level of non-performing loans (NPL) in the Italian banking system is one of the main sources of concern for European authorities. But Germany has not put its house in order either, as the country is seen as in a state of “denial”.

“In all euro area countries, there are … banks that are not doing so well but are committed — and bravely so — to tackling their problems; and then others that are somewhat in denial and will have to change to improve,” Daniele Nouy, chair of the SSM supervisory board, told Finnish magazine Talouselämä.

She was responding to questions about the failures to clean up the banking sector in Italy and in Germany, Reuters reported.

The Italian bank Monte Paschi, with a capital shortfall of at least €8.8 billion, requested public aid but the rescue has yet to be approved by European authorities.

Problems also recently arose in Spain, whose banking system received a €41 billion bailout from the European Stability Mechanism.

Banco Popular holds €37 billion in ‘bad loans’ related to the construction bubble. The government said it should not expect to receive public funds, and a merger is being considered instead.

A senior EU official said on Thursday that the Spanish authorities are dealing with this bank “with clarity”.

The Eurogroup will discuss on Monday (22 May) the situation of Spain’s financial system after the rescue programme.
Links between banks and public debt?

Last week, Marco Buty, director general of Economic and Financial Affairs at the European Commission, warned that “in some member states, the potential for negative feedback loops between weak banks and the sovereign is also still in place,” he wrote in the preface of the Commission’s spring forecast.

But Dombrovskis gave a more positive assessment today.

“The link between sovereigns and banks is indeed loosening,” he said.

He explained that “following an upswing during the crisis, banks now tend to hold fewer domestic government bonds. And we see positive developments in the price of bank bonds, which are starting to decouple from sovereign ratings.”

But European banks face a toxic cocktail of bad loans inherited from the financial crisis, low profitability due to the ECB’s expansionary monetary policy, and the challenges posed by the emerging technological platforms operating in the financial sector (Fintech).

But the monetary stimulus will soon start to decrease as inflation increases in the eurozone.

“Should we reach a point where the path of inflation is expected to be self-sustaining, but long-term unemployment remains high, there should be no doubt as to how I would decide regarding our policy stance,” ECB executive board member Benoit Coeure said today, according to Reuters.

The European Central Bank cannot risk running “the economy hot” to support employment once inflation stabilises at its target of almost 2%, he added.

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