November 7, 2012 6:00 pm

Draghi reassures Germans on banking union

European banks should be spared from having to pool their deposit guarantee schemes, Mario Draghi, president of the European Central Bank, said on Wednesday in the latest concession to German fears over banking union proposals.

Aimed at addressing weaknesses in Europe’s currency union that became apparent during the sovereign debt crisis, the banking union plans seek to place eurozone banks under the overarching supervision of the ECB, followed by the creation of a bank resolution scheme for the bloc and, eventually, a common deposit scheme.

However, the plan has met with political and industry resistance in Germany, where banks oppose a single deposit “pot” that would pool resources in a banking union. German institutions say that would put their savers’ money on the line to bail out banks in other countries.

Addressing a German mutual banking event in Frankfurt, Mr Draghi said: “Financial union does not have to imply the pooling of deposit guarantee schemes, an issue that I know is of concern in this country. Organising and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness.”

While Mr Draghi’s comments chime with the thinking of officials in Brussels, it was the most explicit acknowledgment yet that plans for a single deposit guarantee scheme, already shelved, may not be revived.

Establishing a common backstop for the €5tn of deposits in the eurozone has proved by far the most politically contentious element of Europe’s drive to form a banking union. Since the autumn, member states led by Germany have been gradually scaling back ambitions for when and how a single deposit insurance scheme should be established.

As recently as two weeks ago, Vítor Constâncio, Mr Draghi’s deputy, told a committee hearing at the UK House of Lords that he believed such a scheme would follow common supervision and bank resolution arrangements, although “not in the very near future” as there were concerns about “potential significant commitments” by member states.

The BVR, which represents Germany’s 1,100 mutual banks, welcomed Mr Draghi’s comments but emphasised the need to ensure national bank supervisors continued to play a role.

“I agree with Mr Draghi that we cannot currently have the aim of creating a common European deposit guarantee scheme,” Gerhard Hofmann, BVR board member, said. He added that it was important to “integrate national supervisors” into eurozone bank supervision “particularly in the supervision of regional and national banks”.

Mr Draghi said in a letter to a member of the European Parliament this week that it was essential that the ECB held supervisory power over “all euro area credit institutions” to ensure a level playing field.

But, in his speech, also reiterated that day-to-day tasks would remain with national supervisors.

Germany’s council of economic advisers to the government, known as the “wise people”, also backed the view that a pooled deposit guarantee scheme should be avoided. “Introducing such an insurance scheme would entail significant risks, since losses would be mutualised after the fact,” they wrote in their annual report, published on Wednesday.

European ministers have been deadlocked for almost two years over a far more modest European Commission proposal, which aims to co-ordinate rules between national deposit guarantee schemes and facilitate lending between national schemes in emergencies. While EU leaders have stated their intention to reach a deal on harmonising the schemes, there is still doubt over whether it will include any provisions to share risks, even through lending.

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