EU Banks Cut Risks as Ministers Weigh Start of Europe-wide Deposit Insurance Scheme

November 28, 2018 Updated: November 28, 2018

BRUSSELS—European Union banks have cut bad loans and raised provisions, the European Commission said on Nov. 28, before EU finance ministers decide next week when to introduce an EU deposit guarantee scheme that hinges on lower risk in banks.

The European Deposit Insurance Scheme (EDIS) would guarantee that the holder of a deposit of up to 100,000 euros ($112,890) in any bank in a euro zone country would always get it back in case of a bank collapse.

But while this would boost confidence in the banking sector and help prevent bank runs, Germany and some other northern European countries say it can only be introduced once banks in various countries become safer by reducing existing risks.

Those concerns have been aggravated by fears Italy’s rising borrowing costs under an anti-austerity coalition government could trigger a new sovereign debt crisis.

France, countries in southern Europe and some supervisory board members of the European Central Bank say risks have been reduced enough for the insurance scheme to start.

But Germany wants banks to clean up their balance sheets first, to ensure German taxpayers will not have to pay for any past irresponsibility in other euro zone countries.

German Finance Minister Olaf Scholz said on Wednesday that the reality of a fully-fledged banking union that includes a Europe-wide deposit guarantee scheme remained a long way off.

“A common deposit insurance scheme is at the very end of the road toward an economic and currency union,” Scholz said. “And the road to that goal is long and full of conditions.”

European Union finance ministers are to decide on Monday on a roadmap for beginning political discussions on EDIS as well as other reforms to deepen economic integration between the 19 countries sharing the euro.

German finance minister
File photo of German Finance Minister Olaf Scholz at the start of the 2019 budget debate at the lower house of parliament Bundestag in Berlin, Germany, Sept. 11, 2018. (Reuters/Hannibal Hanschke)

Risk Reduction

One of the key risks banks need to address is the number of non-performing loans, often a legacy of the financial and euro zone sovereign debt crises, and the size of provisions made for them.

“Working out the high stocks of non-performing loans is part of efforts to reduce risks in the European banking sector,” Commission Vice President Valdis Dombrovskis said.

He argued that enough had been done to tackle toxic loans to move ahead with Europe-wide deposit insurance.

“On the basis of the progress achieved on the risk-reduction side, I invite EU Finance Ministers and leaders to agree on concrete risk-sharing measures in December,” he said, referring to EDIS.

Bad Loans

The Commission said in a report the ratio of bad loans in all EU banks fell to 3.4 percent of all loans in the second quarter from 4.6 percent a year earlier, and stood at 820 billion euros in absolute terms.

According to World Bank data the global average for bad loans in 2017 was 3.7 percent of all loans.

But the EU average masks large differences between countries — in Greece 44.9 percent of all loans are bad, in Cyprus 28.1 percent, in Portugal 11.7 percent and in Italy 10.0 percent.

The Commission said the provisioning ratio has also improved to 59 percent and that the longer term trend indicated that the bad loan ratio was approaching pre-crisis levels again.

To help better deal with economic shocks and crises, the EU is also building what it calls a capital markets union (CMU), which would make it easier for investors, companies and individuals to borrow and invest across the EU.

“The Capital Markets Union is about broadening access to finance for small and medium size companies, and to increase investment opportunities in Europe,” Commission Vice President Jyrki Katainen said.

“This is why we count on the support of the European Parliament and the Council to agree swiftly on the outstanding measures we proposed under the Banking Union and Capital Markets Union agenda,” he said.

What is EDIS?

In November 2015 the European Commission proposed to set up a European deposit insurance scheme for bank deposits in the euro area. This proposal was adopted as a part of a broader package of measures to deepen the economic and monetary union, and complete the banking union.

The EDIS proposal builds on the system of national deposit guarantee schemes (DGS), which are known as deposit insurance in the United States.

The goal of a Europe-wide deposit insurance scheme is to provide a stronger and more uniform degree of insurance cover in the euro area, and so reduce the vulnerability of national DGSs to large local shocks, lowering the risk of financial contagion, and boosting overall financial system stability.