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European banking union needs to address fragmentation, not deposit scheme

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European banking union needs to address fragmentation, not deposit scheme

Completion of a long-delayed European banking union should concentrate on reducing fragmentation in the financial sector so it can attract fresh capital to Europe, not on finalizing a controversial deposit scheme, according to UniCredit SpA's CEO.

Jean-Pierre Mustier, who is also head of the European Banking Federation, said it was important to reduce regulatory differences between countries and remove barriers to the competitiveness of European banks versus their U.S. counterparts.

"What is important is that investors look at us as a pan-European bank so let's make sure that we organize our priorities and we look at what bankers need," he told a conference on banking regulation in Brussels.

The banking union project began in 2012 after the financial crisis and its aim is to improve supervision. While the first two pillars, joint supervision and the single resolution mechanism, are in place, finalizing the venture has been fraught with difficulties.

The third and final pillar, a pan-European deposit insurance scheme, known as EDIS and designed to protect savers, has met resistance from Germany and other northern European countries. They do not want to end up paying for bad loans in countries such as Greece and Italy that are still suffering from problem assets inherited from the crisis.

Uniform regulation

But Mustier said the scheme was not key to creating a unified banking sector. He said that lenders needed uniform regulation to prevent variations in their capital requirements depending on where they carry out their business.

"Do I need EDIS? No. Do I have capital fragmented in various countries? Yes," he said, adding that his common equity Tier one ratio — a key measure of a bank’s capital strength — is 19% in Germany and 15% in Austria, but his group CET1 is 12.5%.

Regulators need to look at ways of freeing up capital, not trapping it, so European banks can benefit from a greater free flow of capital and increased liquidity, he said.

Some countries have risk buffers in place requiring lenders to hold more capital, but they do not look at a bank on a group or consolidated basis, he said. There were also different national calculations of the anti-crisis capital buffer MREL, or the minimum requirement for own funds and eligible liabilities, which could create more fragmentation, he said.

"Completion of the banking union is about making sure is that the banking sector is a pan-European banking and that we can attract capital, debt and equity, in Europe," he said.

"We need more capital for our SMEs, and we need more capital for our banks to make sure our banks can be more efficient," he said.

European disadvantages

European banks are also working at a disadvantage to U.S. banks because they have to adhere to tighter regulation, especially in terms of building up crisis-busting capital buffers.

In the U.S. only the biggest banks, or global systemically important banks, are subject to new capital buffer rules such as TLAC, or total loss-absorbing capacity, which applies to the world's biggest banks, while all European banks are subject to MREL, he said.

U.S. subsidiaries have to hold 75% of their TLAC requirement, while at the EU level, the MREL level is between 75% and 90%, he said.

"That’s not ok because subsidiaries of U.S. banks in Europe are put at a competitive advantage because they are subject to U.S. regulations…while EU subsidiaries are subject to a higher requirement," he said.