Germany ready to move on euro zone bank reform, but sets tough conditions

[BERLIN] Germany proposed four reforms on Wednesday that it wanted the euro zone to adopt to complete its stalled banking union, making clear some of the changes it had opposed so far, like deposit insurance, could take place.

Finance Minister Olaf Scholz wrote in an article in the Financial Times that Germany, which has for years blocked any talks on a European Deposit Insurance Scheme (EDIS), would be ready to discuss it, with modifications, under some conditions.

"Now it is time to put together a package to complete the banking union. This has four steps," Mr Scholz wrote, to a lukewarm response from the European Commission and the European Central Bank.

A key to preparing the introduction of EDIS, Mr Scholz said, was a unification of insolvency and resolution laws for banks across the euro zone. Such unified rules now exist only for the biggest euro zone banks; Germany wants them for all banks.

The second step would be to reduce risks that banks might fail, by reducing bad loans and, crucially, limiting the exposure of banks to a single sovereign through regulation of the bonds they hold.

Such limits are highly controversial. Several countries oppose them, notably Italy, since its banks buy much of the newly issued government debt.

"Sovereign bonds are not a risk-free investment and should not be treated as such," Mr Scholz wrote.

"Banks should have to make provision for risks arising from sovereign debt within an appropriate transition period. We should introduce capital requirements reflecting credit and concentration risks from sovereign exposures on banks' balance sheets - in a careful, gradual manner without threatening financial stability," he wrote.

Once these changes take place, Germany would be willing to support pan-European bank-deposit protection as long as individual countries remained chiefly responsible for shielding savers of a troubled bank.

EU rules now guarantee deposits up to 100,000 euros, a provision meant to strengthen confidence in banks after years of crisis that saw the bailout of several top banks.

But existing national schemes to insure depositors are considered inadequate to cope with a major banking crisis. Euro zone policymakers believe that an EU backstop, funded by all EU banks, would be the best guarantee to protect savers and increase market confidence.

Mr Scholz wrote that in the case of a bank failure, a three-step mechanism would apply. First, the money of the national deposit guarantee scheme would be used.

If those funds are exhausted, a new European deposit insurance fund would provide limited additional liquidity through loans, Mr Scholz said.

If additional financing was still be needed, the home country of the failed bank would have to step in.

"A limited loss coverage component for the European deposit insurance fund could be considered, once all the elements of the banking union have been fully implemented," Mr Scholz said.

The German EDIS plan is a more cautious version of an already watered-down European Commission proposal from 2017 that had been on hold because of the opposition of German banks.

"For the first time in years, countries are moving their red lines," a senior euro zone official involved in talks on the banking union said, adding he was "cautiously optimistic" about progress on a roadmap for further work by December.

Mr Scholz also called for preventing arbitrage in the future banking union through a common corporate tax base - making sure that all banks in the 19 countries sharing the euro are taxed on the same things, even if not at the same rate.

Some large German banks like Deutsche Bank and Commerzbank welcomed Mr Scholz's proposal.

"The timing of the initiative is wisely chosen," said Martin Zielke, the chief executive officer of Commerzbank. "The future President of the European Commission, Ursula von der Leyen, has also revitalised this debate," he said. 

REUTERS