SHARE THIS ARTICLE Share Tweet Post Email

Want the lowdown on European markets? In your inbox before the open, every day. Sign up here.

German Finance Minister Olaf Scholz sought to end an impasse in discussions over European banking integration by signaling Berlin may drop its opposition to a key part of the plan.

“We cannot afford this deadlock any longer,” Scholz said in prepared remarks he was due to give at Bloomberg LP’s Future of Finance conference in Frankfurt. “It affects the functioning of our internal market. And it affects the trust of EU citizens in our ability to solve problems -- even those problems that we have fully acknowledged.”

Berlin is ready to consider a form of joint European deposit insurance, something that would stabilize the financial system by reducing the risk of bank runs, according to a finance ministry paper published on Wednesday. That part of the plan has stalled, facing strong resistance from fiscally conservative countries and some parts of the German banking sector.

The goal of a more closely-knit banking system in the euro area is to reduce the interdependence between lenders and their home countries. Breaking down national barriers could also facilitate deals to bolster Deutsche Bank AG and Commerzbank AG, the floundering giants of German banking. And while Scholz said aiding mergers wasn’t the main consideration behind the banking union, they could be a side effect of the proposal.

The proposal may increase the tensions in Germany’s coalition which has been destabilized by the slump in support for the Social Democrats. Chancellor Angela Merkel is also facing dissent from conservatives within her Christian Democratic Union and that faction is likely to be riled up further by any suggestion the government might give ground over the banking union.

The CDU’s initial reaction to the proposal was cautious.

“The proposal gets the debate moving again,” Olav Gutting, a CDU lawmaker on the Bundestag finance committee, said in an interview. “We can’t allow ourselves to fall into a permanent blockade. But we’re standing by our line: Risks must first be reduced and controlled on a sustainable basis -- and then you can have a European deposit insurance.”

Government spokesman Steffen Seibert said during a regular press briefing in Berlin that Scholz’s proposal “made a contribution to a discussion,” but that it hadn’t yet been discussed within the government.

Key steps in the banking union, which was launched in 2012, have already been taken: The European Central Bank was tasked with supervising the biggest lenders, and a new framework was created to deal with failing institutions. Discussions over finalizing the rest have been going on for several years, repeatedly held back by familiar divisions.

Fair, Balanced Compromise

“We welcome any opening and debate that could contribute to bringing the European deposit insurance scheme into life,” Valdis Dombrovskis, the EU commissioner in charge of financial-services policy, said in an emailed statement, adding that the provision is a key element to completing the banking union. “It is clear that all sides need to compromise, and only a fair and balanced compromise can be successful.”

A joint deposit insurance agreement has been the most difficult hurdle as wealthier countries balked at the idea of paying for failures in other states. The German finance ministry proposed a plan where national systems would still serve as the first line of defense in a crisis before countries could turn to a common pot for liquidity.

Selected reactions to Scholz’s proposal: France welcomed the push and agreed that deeper integration of the banking sector is an “absolute priority,” according to an official speaking to reporters in Paris, who added that all different proposals on deposit guarantees need to be looked at.

Deutsche Bank President Karl von Rohr, speaking in Frankfurt, said he hopes “the very welcome position papers receive a good hearing in Brussels.”

Commerzbank Chief Executive Officer Martin Zielke said a full banking union would “strengthen Europe’s competitiveness vis-à-vis China and the US,” according to an emailed statement.

Katharina Utermoehl, senior economist at Allianz SE, said she’s failing to see “ground given” as the proposal comes with familiar strings attached.

Andrea Enria, who leads the ECB’s banking supervision arm, said: “I don’t expect the European deposit guarantee scheme to be in place” by the end of 2023

The offer comes with important caveats, however. Germany repeated a demand from predominantly northern European countries that banks might have to set aside capital when they purchase sovereign debt, just as they do with other assets. Currently, sovereign bonds on banks’ balance sheets are considered risk-free by regulators so no such backup is needed.

Under Scholz’s plan, government debt would be subject to a combination of a free allowance, risk weights based on credit quality and a “concentration factor” to reflect exposures to a specific country. Any such step would be carefully calibrated and phased in over time to avoid overburdening banks, he said.

This idea of stricter rules for sovereign debt has proved highly contentious in the past. Opposition has come from countries with high stocks of public debt such as Italy, where domestic government bonds make up a relatively large share of banks’ total assets.

While Scholz’s move on deposit insurance was welcome, an Italian official who asked not to be named said the conditions attached to it were still unacceptable.

Germany also urges progress on other important open issues:

An insolvency framework for banks: While a special process for big failing institutions has been introduced, lenders that are liquidated under national laws can still be subject to wildly different treatment. In Italy, this has included the use of billions of euros in taxpayer money, something the banking union was meant to clamp down on. Now Germany seeks a “single European set of laws on bank insolvency.”

wildly different treatment. In Italy, this has included the use of billions of euros in taxpayer money, something the banking union was meant to clamp down on. Now Germany seeks a “single European set of laws on bank insolvency.” More flexibility for EU banks: Internationally active lenders often complain that they need to fulfill capital and liquidity requirements separately in each country they operate in. They would rather deploy their resources more flexibly across their groups. Smaller countries, whose markets are often dominated by units of foreign banks, have been reluctant to give up control over the local operations. Germany seeks an “appropriate balance” between these positions.

Further reduction of nonperforming loans: Soured assets should be reduced to 5% of banks’ balance sheets in all member states, or 2.5% net of provisions. That’s well below the current figures in countries including Greece and Cyprus and a repeated demand from some countries.

Scholz also says Europe needs to strengthen its defense against money laundering in the financial system, without going into much detail.

Political talks among euro-area governments on the issue are due to take place over the coming weeks. A senior EU official speaking to reporters in Brussels on Tuesday signaled optimism that an agreement may be reached by December on holding further talks aimed at agreeing a phase-in of a deposit guarantee scheme. Countries which were opposing such a plan have watered down their red lines, the official said.

If meaningful progress is reached on these issues, it could help address a lack of consolidation among banks in Europe, which has made them less competitive internationally. Bank executives have said that without the proper framework, cross border mergers that could improve efficiency and help slash costs are not in the cards.

Security of Savings

The central lobby organizations for Germany’s savings and cooperative banks, which represent the bulk of the country’s retail lenders, issued a carefully worded statement indicating they’re not completely opposed to Scholz’s plan.

“It is understandable to discuss measures to improve the framework conditions of a developing EU capital market,” the DSGV and BVR lobby groups said in a joint statement. “The security of savings is not up for negotiation.”

The two organizations are influential voices in Berlin and have traditionally been one of the biggest opponents to any concessions from Germany on the European deposit insurance.

— With assistance by Patrick Donahue, Steven Arons, and Nicholas Comfort

( Updates with Italian comment in the 15th paragraph. )