The European Central Bank is likely to reassure European Union leaders on Friday that euro zone banks are safe after market turbulence caused by Swiss and U.S. banks, but call on them to push on with an EU deposit insurance scheme, officials said.
EU leaders are meeting for a second day of talks in Brussels to discuss economic issues, including changes to the bloc’s fiscal and debt rules, but concern over the impact of the troubles of Credit Suisse and Silicon Valley Bank (SVB) on the EU banking system are likely to dominate the talks, officials said.
The collapse of U.S. regional banks SVB and Signature Bank earlier this month prompted a rout in banking stocks as investors feared other ticking bombs in the industry. This spilled over to Credit Suisse Group AG, which led to UBS Group AG to take over the 167-year-old Swiss bank to avert a wider crisis.
ECB President Christine Lagarde will present to the leaders the economic and financial stability situation of the 20 countries sharing the euro and likely face questions about ECB plans for more interest rate rises to fight inflation.
“Christine Lagarde will be reassuring on banks after the Swiss solution,” one official said. “She will ask the leaders to complete their Banking Union and go forward on the Capital Markets Union.”
“Her message is likely to be the ECB is determined on monetary policy but data-dependent, no forward guidance. There is no trade-off between financial and price stability goals. The ECB has parallel tools to do both,” the official said.
EU DEPOSIT INSURANCE NEEDED TO COMPLETE BANKING UNION
EU leaders are likely to get a similar message on banks from the chairman of euro zone finance ministers Paschal Donohoe.
“He is likely to say that overall banks are in good shape, they have good capital liquidity buffers, although there is no room for complacency as we have seen from the banking turbulence,” a second official said.
“He is likely call for continued steady progress on completing the Banking Union, and to say Capital Markets Union is important for competitiveness and more needs to be done.”
“Completing the Banking Union“ is EU code for introducing a European Deposit Insurance Scheme (EDIS), the last missing element from the project launched in 2012.
The Banking Union is already two-thirds complete. The EU has set up a single supervision of the euro zone’s top banks in the hands of the ECB and a single resolution authority with a special fund to resolve failing lenders.
While most EU countries have some form of national insurance that guarantees deposits up to 100,000 euros ($108,320.00), there is no EU-wide scheme, nor a way for authorities to cooperate across border if a banking crisis is too much for one country alone.
The main opponent of EDIS is Germany, concerned that if deposit guarantees are mutualised at EU level, Berlin could end up paying deposits of failing banks in other countries, like Italy, still burdened with poor credit or investment decisions from years ago.
The Capital Markets Union was launched in 2015 to facilitate access to private capital by EU companies, which now mainly depend on bank loans for any financing. Progress has been slow due to differences in tax, insolvency or prospectus laws of the EU‘s 27 countries.