ECB chief economist calls for ‘more ambition’ on banking union

Posted on November 24, 2016

The eurozone must create a continent-wide deposit insurance scheme for its banks and have more sharing of risk between taxpayers and creditors to protect the financial system against “panic and contagion”, the European Central Bank’s chief economist has said.

Speaking in Vienna on Thursday, Peter Praet called on EU policymakers be “more ambitious” in their attempts to finally complete plans to create a Banking Union, first launched in the wake of continent’s debt crisis in 2010.

Mr Praet touched upon controversial areas including a joint deposit scheme for the banking system which has been fiercely resisted by Germany – the eurozone’s largest creditor nation – before more risk-sharing measure are put in place.

“The current incomplete banking union is asymmetric: while decisions on liquidity waivers are taken at European level, the relevant risk-sharing mechanisms are still national”, said Mr Praet, adding:

In each country, bank depositors are protected by the national guarantee scheme. If a bank fails and the Single Resolution Fund does not have sufficient resources available to finance its resolution, which may well be the case for some time.

The chief economist warned that without such bold moves to have a fiscal backstop to helped troubled banks in times of stress, Europe’s financial system would be vulnerable to “panic and contagion”.

He said:

We cannot expect to have a fully integrated banking sector that can share risks without common institutions that can also share risks, namely for deposit insurance and bank resolution. Without such institutions, there is a real prospect that the banking system will remain fragmented, and that is ultimately to the benefit of no one in the euro area.

Image courtesy of Getty

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