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Completing the Banking Union

The Five Presidents’ report published in July 2015 argues that completing the banking union should be one of the most immediate steps of the broader p

Speakers

Levin Holle

Director General, Financial Markets Policy, Federal Ministry of Finance, Germany,

This is an off-the-record seminar for selected invitees only, taking place in Paris.

The Five Presidents’ report published in July 2015 argues that completing the banking union should be one of the most immediate steps of the broader project of “Completing Europe’s economic and monetary union”. However, the urgency and importance of this step is contested. Completing the banking union involves some forms of fiscal backing (a bridge financing of the Single resolution Fund – SRF, ESM recapitalization instrument), some mutualisation of banking risks (through a common deposit insurance scheme) as well as decreased linkages between banks and sovereigns through overly large investments in sovereign bonds of countries, in which the respective bank is located.

The objective of this off-the-record seminar is to discuss the requirements for completing the banking union at the expert level. Several arguments need to be carefully weighted. The theory of insurance prescribes that a common deposit insurance scheme (or a fiscal backing to the SRF) should be introduced “behind the veil of ignorance”, which is not the current situation of the euro area. However, waiting before risks are equally distributed could maintain the vulnerability of the euro area to a bank run. The Greek crisis has raised questions as regards to whether or not stronger common deposit insurance mechanisms could help preventing large deposit outflows, which were mostly a reaction to re-denomination risks. Others have argued that constraints on banks’ holding of sovereign bonds could increase financial instability, especially once the ECB’s quantitative easing programme comes to an end.