Europe should not push for a mutual deposit guarantee scheme for eurozone banks before they have cleared most nonperforming loans from their balance sheets, the CEO of Germany's fourth-largest bank by assets, DZ Bank AG, has warned.
During the presentation of the bank's 2017 financial results, Wolfgang Kirsch spoke about the European Insurance Deposit Scheme, or EIDS, which would take the existing system of national deposit guarantee schemes further and provide a guarantee for all deposits of up to €100,000 in any eurozone bank.
The EIDS forms a key plank of Brussels' plan to develop a European banking union. A key barrier to the completion of the project has been Germany's opposition to the scheme; its main concern is that if it is established before all major banks in the eurozone have cleaned up their balance sheets, some countries will end up paying more for bank failures in other member states.
The dispersion of bank nonperforming loans is unequal in Europe. According to European Commission figures, the average NPL ratio across the EU stood at 4.6% in June 2017, while in Italy alone it was 12.2%, in Portugal 15.5%, and in Greece 46.9%.
Germany's acting finance minister, Peter Altmaier, said in January that talks on the EDIS should be suspended until "sufficient progress" has been made on risk reduction, primarily connected to the reduction of nonperforming loans. Finland and the Netherlands have also raised concerns regarding the EDIS.
But recent developments indicate that opposition to the scheme has lessened, according to DZ's Kirsch. While previously the prevailing opinion has been that a completion of the banking union cannot be seriously considered before NPLs have been reduced, that notion has now changed and banks' efforts to reduce bad loans are being seen as sufficient to contemplate setting up the EDIS. Only Germany now stands in the way of that, Kirsch said.
"By no stretch of the imagination can I see that we would have made any notable progress on the issue of nonperforming loans, especially if we look to the south [of Europe]," he said. "We can therefore only issue an urgent warning against irrational exuberance about EU deposit insurance. It is not a smart approach — either when it comes to investing or when trying to stabilize the European financial system."
EU authorities are tending to see risk reduction and risk sharing going hand in hand. European Commission Vice President Valdis Dombrovskis said in a speech at the end of January "the time is ripe to move at political level on completing the banking union" and said that, for this, "we should move in parallel on risk reduction and risk sharing."
"When you hear discussions about EDIS, it is always a discussion between risk reduction and risk sharing, which have to be balanced and have to be looked at, at the same time," ECB executive board member Sabine Lautenschläger said at a Feb. 7 press conference of the ECB in Frankfurt.
EU finance ministers are mulling how to measure risks at EU banks ahead of implementing the EIDS, with Altmaier saying they have agreed to ask the European Commission to analyze the full effect of the recent U.S. tax reform on European banks, Reuters reported. This discussion that is key to getting buy-in from Germany, according to the newswire.
A number of large European lenders, including Deutsche Bank AG, Credit Suisse Group AG and UBS Group AG, posted a loss for the fourth quarter of 2017 partly as a result of the U.S. tax bill.
