The European supervisor is sounding the alarm again. In the event that the European Banking Union is not completed, the fragmentation of the banking market in the eurozone will put the single currency “at risk”, as confirmed on Tuesday 17 May by the Chairman of the European Central Bank’s (BCE) Single Supervisory Board, Andrea Enria before members of the Institut Montaigne.
Since the adoption of the first package of measures seven years ago, the Eurogroup has made progress on the first two pillars of this union: individual supervision, which is a prerequisite for further actions, and a single resolution, with the creation of a mutual fund gradually topping up by the big banks in order to cover any defaults . This single decision fund annoys French banks, which feel they are being overlooked by shareholding rules.
The third pillar, i.e. the creation of a European Deposit Guarantee Fund that intervenes in addition to guarantee funds for national deposits over €100,000, faces political opposition from some member states. Some countries, notably Germany, fear that their taxpayers will have to pay deposits if a small bank in an Eastern European country fails. The amounts at risk are enormous: deposits in banks in the eurozone total 7,000 billion euros and are supposed to rise to 8,000 billion next year, making the topic “more politically sensitive”, emphasizes Andrea Enria.
Voluntary, European Supervisor worked on reassurance. “Banks’ contributions to guaranteeing funds are based on their level of risk,” he said. If the bank does not reduce its risk, it pays more.” On the other hand, Andrea Enria recommends working to improve the solution framework for medium-sized banks, and the judicial liquidation process for small banks. He believed that harmonization of rules in order to “reduce the diversity of approaches among national authorities” is necessary To build trust among member states.
The head of the single supervisory board insists that a European-wide deposit insurance scheme is essential to ensure confidence in the system and the single currency. “If a euro deposited in one member country is seen as less secure than in another, depending on the strength of the domestic deposit guarantee system, the integrity of the single currency is threatened, and in the event of a crisis, we risk seeing deposits flee to member countries other,” Andrea Enria points out. He also warns eurozone banks: opposition from some member states risks “accelerating the fragmentation of the European banking market, prompting many banks to re-examine their ‘business model’, at a time when they are facing the dual challenge of digital transformation and green transformation.”
Example of the American Deposit Insurance Fund
To persuade the eurozone countries, the supervisor praised the merits of the American Deposit Guarantee Fund (FDIC), which the banks themselves created in 1933, right after the Great Depression. A system that, according to him, has proven itself by avoiding “spending American taxpayers’ money.” This fund, in fact, is fed by contributions from banks. Andrea reassured Enria, but it is rarely used to repay deposits in the event of bankruptcy. Even at the height of the 2008 financial crisis, when the FDIC had to manage the failures of 489 small banks, representing a total of $683 billion in assets, the total liquidation of the bank’s assets, which led to the repayment of deposits, was triggered only 26 times in the amount of $16 billion. In most cases, the FDIC worked to find a buyer for the assets of failed banks, avoiding transferring deposits causing them to be repaid.
To take the point home, Andrea Enria also noted that the eurozone already has the resources to deliver a system as efficient as the Americans. The consolidated decision fund will be awarded 80 billion euros by the end of 2023, while the national guarantee funds will be supplemented by 37 billion euros. “We have resources equivalent to those of the FDIC, but we are not using them because we do not have the right tools,” the head of the single supervisory board lamented.
Towards controlling cross-border activities
If Eurogroup members cannot agree to finalize the Common Deposit Guarantee Fund, Andrea Enria sets out another path: to give more prudential powers to the European Central Bank and to the single supervisor with the aim of ensuring that capital and liquidity levels are stable. Sufficient in subsidiaries and branches of banking groups with cross-border activities.
At the Eurozone Summit on December 16, 2021, the European Council, made up of the heads of the 27 member states, reiterated the call for the completion of banking union, and demanded that the Eurogroup “develop a consensual step – a step-by-step action plan with a timetable”. The consensus is precisely on this point that the shoe pinches.