Donnerstag, 16.08.2018 12:41 Uhr

Pooling risk without pooling governance

Verantwortlicher Autor: Carlo Marino Rome, 07.12.2017, 10:56 Uhr
Presse-Ressort von: Dr. Carlo Marino Bericht 5763x gelesen

Rome [ENA] In spite of progress made with the European banking union, the cross-border penetration of banking within the euro area remains moderately incomplete. More pan-European banks are achieving economies of scale and better diversifying risks. Total mergers and acquisitions activity in the euro area banking sector has shown a declining trend since 2007, both in terms of the number and the value of transactions,

with activities having a tendency to be domestic. Current assessments suggest that risk sharing remains low in the euro area. In November 2015 the Commission recommended to set up a European deposit insurance scheme (EDIS) for bank deposits in the euro area. EDIS is the third pillar of the banking union. This proposal was implemented as a part of a broader package of measures to develop the economic and monetary union, and complete the banking union. The European deposit insurance scheme proposal builds on the system of national deposit guarantee schemes (DGS) ruled by Directive 2014/49/EU. This system already guarantees that all deposits up to €100 000 are protected through national deposit guarantee schemes all over the EU.

Anyway, recently Supervisory Board Chair Danièle Nouy said that some banks are heavily burdened with bad loans, in an opinion piece in the Financial Times. The question is what measures does the European deposit insurance scheme do in advance in order to overcome the impasse of certain Member States concerning the agreement on the European deposit insurance scheme. In fact, national supervisory authorities remain responsible for carrying out tasks not conferred on the ECB, including the supervision of third-countries. A system with joint financial means and joint liability, such as European deposit insurance scheme, would work more efficiently, i.e. providing a higher level of protection

than that based on national Deposit Guarantee Schemes. European deposit insurance scheme would provide a stronger and more homogenous degree of insurance cover in the euro area. This would reduce the vulnerability of national DGS to large local shocks, ensuring that the level of depositor confidence in a bank would not depend on the bank’s location and weakening the link between banks and their national sovereigns. The Single Supervisory Mechanism (SSM) and the single resolution mechanism (SRM) are designed to address financial stability concerns relating to large cross-border institutions.

However, without truly pan-European banks and with banks pulling back from foreign markets, the ECB seems not to be aware of the lack of suitable tools at EU level. Bankrupt banks have predominantly been bought by domestic banks, rather than foreign banks. Arrangements based on mandatory reinsurance, mandatory lending or a fully mutualised fund agreed bilaterally among deposit guarantee schemes haven't been appropriately considered.

Actually, without some degree of governance coordination through a supranational agreement, none of these arrangements would be feasible in a Banking Union context. Eventually, the incentive misalignment created in pooling risk without pooling governance would result in coordination challenges, which would ultimately undermine depositor confidence in the capacity of these arrangements to function effectively in a banking crisis.

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