Why Brexit, Covid and the Ukraine war are spurring calls for a European banking union

A renewed push by top policymakers has raised the prospect that progress towards an EU banking union could soon be on the cards.

Plans for bringing major lenders across Europe onto the same rulebook have been frustrated for years, but leading figures — from the Irish finance minister and the European Commission to the French central bank governor, and even those inside Germany’s Bundesbank — are offering glimmers of hope for the future of the project.

The Covid-19 pandemic, conflict in Ukraine, and even Brexit are spurring demands to shore up Europe’s financial system further, the senior officials say, as the European Commission eyes a deal over next steps by the summer. 

After a Eurogroup meeting on 14 March, Irish finance minister and Eurogroup president Paschal Donohoe announced a minor breakthrough — officials had agreed to get back around the table after Donohoe proposed a phased approach to moving forward, which he followed up with an op-ed in the Financial Times doubling down on his hopes for the future.

“Recent events have strengthened our resolve to agree on this long-standing project,” his update after the Eurogroup meeting read. “We agreed the banking union can contribute to both short-term goals and longer-term priorities and that more than ever we need better functioning banking and capital markets to rise to the opportunities and responsibilities that lie ahead. But equally important is the imperative of reinforcing our financial stability, our resilience to external shocks to protect our taxpayers and our depositors. So completing the banking union would be of benefit to us all.”

He told Financial News in an interview on 30 March:  “While I ultimately do believe that we will have some difficult and demanding negotiations ahead, I also believe that we will find a way of getting agreement.”

In February, the governor of the Bank of France, François Villeroy de Galhau, also made an impassioned plea to break the impasse.

Describing the EU’s collection of disparate national banking and financial systems as the bloc’s “Achilles’ heel”, Villeroy de Galhau said that “there is growing awareness that European strategic autonomy matters and that financial sovereignty is part of it”.

“This shift started with the Covid crisis but it is being underlined even more starkly now by geopolitics,” he added.

Another issue that has fostered increased urgency is Brexit.

Villeroy de Galhau’s February speech notes that “national reflexes are still present, with countries reasoning vis-à-vis ‘their’ banks and ‘their’ financial centre. The result is that each European country, and the EU as a whole, are losing to the benefit of London”.

Brexit isn’t the only factor, but it is a factor surrounding increasingly proactive discussions on banking union, according to a source familiar with the bank’s thinking.

Discussions around harmonising banking rules across the continent began all the way back in 2012. In response to government bailouts of banks across the Eurozone, officials said savers and taxpayers alike needed to be protected through a single framework governing lenders, based on rules around how much capital needed to be held in the event of a collapse, how failed banks would be resolved, and how deposits would be insured.

Several of these ‘pillars’ have been agreed. But while capital buffers and crisis fund guidelines are now in place, a Europe-wide deposit insurance scheme remains elusive – a sore mark given it was first proposed in 2015 and other pillars had been agreed to years earlier. 

Any progression of the project appeared to be utterly bogged down. In October 2017 the European Commission — the bloc’s executive body — urged lawmakers in the European Parliament to make swift progress on the legislation that would complete the banking union’s architecture.

German finance minister Olaf Scholz lamented the “continuous gridlock” in 2019, hinting concessions could be in the works. When he became chancellor, commentators said this made it even more likely that the impasse would be solved.

Soon after Donohoe took over as Eurogroup president in July 2020, he also placed completing a banking union as one of his core priorities.

However, change was elusive despite all of these efforts.

In June, Eurozone finance ministers on the Eurogroup struck out on attempts to agree on a timetable to add a common deposit insurance scheme to the union. After a dinner of finance ministers in December, a deal again failed to materialise.

This left the project floundering in the same spot for years, until now. Consensus is emerging, particularly in light of Russia’s war on Ukraine, that the deadlock needs to be broken, 

READ Irish finance minister Paschal Donohoe: It’s now or never for an EU banking union

It’s not just the pandemic and war in Ukraine that has sparked renewed interest in forcing through the next stages of a banking union. As Villeroy de Galhau noted: “EU banks are losing ground on their own soil — the market share of the six major US investment banks in Europe increased from 44% to 58% between 2013 and 2020.”

An EU Commission official told FN that it is targeting agreement for a banking union work plan by June, paving the way for  “swift Commission legislative proposals”.

“A complete banking union would underpin a strong banking sector, a sector that is undergoing significant transformation due to digitalisation and new market participants. The current geopolitical situation also highlights the need to strengthen the long-term resilience of the EU financial sector.

“We call on governments to make the necessary compromises to achieve these benefits.

“We need to live up to our promises as policymakers to do all we can to maintain a strong European banking intermediation and equip our authorities with adequate tools to manage banking crises, with all the impact that they could have on lives, livelihoods and taxpayers’ money.”

However, an obstacle still remains in German acceptance. The country, Europe’s largest economy, is demanding that a stronger safety net only be enacted once more bad debts are offloaded from southern European banks.

“For the Bundesbank, it is essential that any move towards greater risk sharing among member states in the banking union is backed with further steps on risk reduction,” a Bundesbank spokesperson told FN. “In this regard, the Bundesbank advocates a comprehensive review on the regulatory treatment of sovereign exposures.”

Hope remains, however, not least within the Bundesbank itself.

“From our assessment, the current events might provide new momentum on the issue. However, the will to finalise the European banking union was also strong before,” the Bundesbank spokesperson said. 

“The Bundesbank supports the ongoing discussions to finalise the third pillar of the Banking Union, a European Deposit Insurance Scheme. The potential concrete design of EDIS is still under discussion. 

“As a first step, a roadmap is needed. The Bundesbank supports any steps towards such a roadmap. It is important that such a roadmap comprises both risk sharing and risk reduction measures.”

Alluding to the potential for Germany to soften its stance, Villeroy de Galhau said in his February speech that “recent openings in the position of several countries – especially along the Rhine… could hopefully offer the possibility to reach agreements.”  

READ Italian problems show banking union is long overdue, not premature

Powers outside Germany are starting to aim lower as well.

Villeroy de Galhau used his speech to say the main deadlock — a fully-fledged European deposit insurance scheme — should no longer be a prerequisite in future discussions.

The governor has not put plans for an EDIS aside completely, a person familiar with the bank’s thinking told FN, but believes any plans should be shelved because it is an unnecessary roadblock to a union.

“Let me stress it for French and European bankers who are gathered here: accepting good compromises is often a sign of intelligence; maintaining for ever excessive demands is not, and can be a road to failure,” Villeroy de Galhau said.

To contact the author of this story with feedback or news, email Justin Cash


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