The European Central Bank is urging EU governments to accelerate the creation of a single deposit insurance system in an effort to break a prolonged stalemate in banking-sector integration—and at the same time warning against weakening regulatory standards in the name of making banks more competitive.
In its response to a European Commission consultation published on Tuesday, the regulator calls for “concrete steps” to complete a pan-European deposit insurance scheme “within a clear timetable”. Such a system has long been seen as the missing link in creating a level playing field for banks across the EU.
Yet efforts to introduce it have for years run into resistance—including from Germany, which is concerned about the risks of cross-border liability sharing. The ECB is calling for “the current impasse to be overcome”.
At present, deposits of up to 100,000 euros are protected by national schemes, with individual states acting as the “ultimate fiscal backstop”.
In the ECB’s view, a pan-European fund would be “less prone to depletion than national deposit insurance schemes”, helping to loosen the potentially dangerous link between banks and the states in which they are registered.
The absence of a unified mechanism, the regulator says, sustains the “persistent fragmentation” of Europe’s banking sector and limits banks’ ability to grow and compete globally.
Cross-border banking activity has in effect seen no meaningful development over the past decade—not least because of “obstacles” to mergers.
At the same time, Frankfurt rejected calls from the banking industry and several governments to ease regulation—in particular restrictions on the use of internal risk models and stringent requirements for dealing with non-performing loans.
The ECB stresses that these rules, which lobbyists describe as costly and cumbersome, “are essential to preventing the underestimation of risks”.
In the report, the regulator also once again questions one element of bank capital introduced after the global financial crisis—the so-called hybrid debt instruments that banks have issued extensively over the past 15 years.
As far back as December, the ECB said that such instruments—known as additional tier 1—should be brought closer in their characteristics to equity capital.
The current document stresses that their loss-absorbing capacity “could be improved”, and one option under consideration is to abolish them altogether.
However, the regulator warns that such a move raises “complex questions from the standpoint of maintaining resilience and compliance with Basel standards” unless those instruments are fully replaced with common equity tier 1—a more expensive form of bank capital.