Rolf Englund IntCom internetional
Europe’s banking union lacks the key element of deposit insurance
Isabel Schnabel member of the German Council of Economic Experts FT 28 August 2018
Without cutting the cord between sovereigns and banks, the so-called sovereign-bank doom loop, completion of the banking union is impossible.
A strong eurozone needs a full banking union
Opposition to the early introduction of common deposit insurance is intense in Germany, which suspects that the scheme is a smokescreen for the proposition that its taxpayers and savers should cough up on behalf of depositors in other eurozone countries burdened with collapsing banks.
Germany also contends that European policymakers should reduce excessive risk-taking in the financial sector before they proceed with risk-sharing measures, such as common deposit insurance.
The head of the Federal Deposit Insurance Corp. says banks have responded to low margins by extending long-term assets more than long-term liabilities,
In America bank deposits and company pensions are protected through sector-wide schemes, funded by a levy on those that participate.
Banks compete in similar lines of business, lending against commercial or residential property or (in the late 1970s) channelling money to developing nations. That other banks are doing the same thing tends to breed confidence, rather than caution. Indeed, executives may come under pressure if they are losing market share in a popular area. When banks lend money so that people can buy assets, the prices of those assets rise; in turn, that makes the banks more confident about their original lending decision. As a result when the market turns, a lot of banks can have similar problems.
The example of the 1930s, when a lack of public confidence in the banks contributed to the Depression, is impossible to forget.
But such schemes may breed a degree of complacency that there will always be someone else around to fix any problems. The costs of that complacency are now becoming clear.