Euro zone likely to delay some banking decisions to December

[May 23, 2018]   By Jan Strupczewski

BRUSSELS (Reuters) - The euro zone is likely to push back some of the key decisions on completing its banking union to December from June because of lack of trust between governments, made no easier by the emergence of a eurosceptic coalition in Italy, officials said.

All EU finance ministers except Britain, which will leave the EU next year, are to discuss a proposal to divide the process into two stages when they meet in Brussels on Thursday.

That would allow them to make progress on plans to reduce banking sector risk while disentangling those negotiations from details over the even more politically delicate question of how to share risk across countries.

"In the process of deepening the monetary union, the most important obstacle is the lack of trust," one senior euro zone policy-maker said. "It is more about the political risk than financial considerations. It is more about being afraid of own political constituencies than pure arithmetic of financial exposures."

The banking union is intended to make the financial sector more robust by setting up one set of rules for all banks to follow, one supervisor -- the European Central Bank -- and one resolution procedure with money to back it in case a bank fails. It will apply automatically to the 19 countries that use the euro, and other EU member states also have the right to join.

To finish it, governments have to agree on a pan-European bank deposit guarantee scheme so that all citizens have the same level of protection for their savings. Governments also need to backstop the single resolution fund (SRF), financed by banks themselves, with loans from the euro zone bailout fund ESM in case a major banking crisis drains the SRF too quickly.

Both the deposit guarantee plan and the SRF backstop have caused controversy, mainly between northern European countries led by Germany and the south, where Italy's banking sector is seen as the biggest challenge. The group led by Germany and the Netherlands is worried that some banks in the south may have taken too many risks with lending and does not want to share responsibility for their deposits until such risks are reduced.

TWO STAGES

Under the two-step approach prepared for the ministers' discussions on Thursday, the euro zone would move on risk sharing and risk reduction in parallel, but with more emphasis on risk reduction.

The headquarters of the European Central Bank (ECB) and the Frankfurt skyline with its financial district are photographed on early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach

In June the euro zone would address the risks in banks with the implementation of guidelines on bad loans from the Single Supervisory Mechanism, agreeing on tools to measure risk and the European Commission's risk reduction package.

As part of risk sharing, euro zone leaders would agree at their summit on June 28-29 that the ESM could, in principle, be a backstop for the bank resolution fund, and set a date for starting a political discussion on the deposit guarantee plan.

On the risk reduction track, there is already broad agreement among euro zone policy-makers that risks in banks should be measured using the capital, leverage, liquidity coverage and net stable funding ratios.

There is also broad agreement in principle, though with further work on detail needed, that regulators should look at non-performing loans, assets whose value is based on management assumptions, and a bank's total ability to absorb losses.

In December, leaders would agree to reduce risks further through a framework for bank insolvency and restructuring, a finalization of the policy on binding loss-absorbtion capacity requirements, the Commission package on bad loan reduction, anti-money laundering steps and benchmarks for risk indicators.

In risk sharing, December could bring details on the ESM acting as a backstop for the bank resolution fund, changes to the treaty that set up the ESM, and agreement on the principles of the euro zone deposit guarantee scheme.

(Reporting by Jan Strupczewski; Editing by Peter Graff)

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