The EU summit, which has just concluded, will celebrate the “satisfactory progress” made in the Brexit negotiations and leave self-satisfied European leaders to enjoy year end celebrations with the feeling of having accomplished their duty! The cracks in the EU unanimity on the sensitive matters of migration and further deepening Eurozone integration will keep alive the hopes of extreme Brexeteers that the worst consequences of Brexit will be avoided by an eventual collapse of the EU itself.

While there will be little respite in Brexit negotiations with the focus on the “transition period” starting early in the new year, other priority preoccupations, in particular reforming the Eurozone, are being pushed back to next June after the hoped for formation of a new German government, a timetable that could be further altered in light of the Italian elections.

One of the few elements of consensus surrounding the debate on reinforcing the Eurozone is that a first and indispensable step is completing the Banking Union. This particular aspect is likely to overshadow initially the more difficult “political” measures such as creating a Eurozone budget, agreeing Eurozone “own resources” with a corresponding “borrowing capacity” and appointing a Eurozone Finance Minister.

Completing the Banking Union is itself still the subject of deep divisions among the zone’s 19 EMU members. It needs to address two important questions:

– Transforming the European Stabilisation Mechanism (ESM) into fully fledged European Monetary Fund (EMF) which, among other aims, should provide a financial backstop to the Union’s Bank Resolution Mechanism.
– Designing and implementing a Deposit Insurance Guarantee Mechanism (DIGM).

This paper focuses on the question of the DIGM.

Its need was identified as a necessary component of the Banking Union designed in the aftermath of the European Sovereign Debt crisis. It has proved to be the most contentious, opposing the advocates of reducing the risk factors, in particular by restoring the solvency of banks burdened by large amounts of non-performing loans (NPL) to those insisting on greater solidarity among members by “mutualising” the guarantee offered to depositors.

The Commission made proposals to phase in the DIGM over time in order to allow weaker institutions to deal with legacy NPLs before full mutualisation of risks was implemented. This period would also allow further progress in breaking the bank/government doom loop by limiting the amount of Member’s sovereign debt banks were allowed to hold. Both these measures found support among the “de-riskers” led by Bundesbank Chairman Jens Weidman and supported more recently by ECB President Mario Draghi.

However, by centring the discussion around these highly complex and technical measures and emphasising diverging “political” motivations, the powerful “banking lobby” has proved, once again, to be capable of promoting its sectorial interests as efficiently as it had before the financial crisis. The motto “to big to jail” is now regularly cited alongside “to big to fail” as was convincingly demonstrated in a recent documentary shown on the TV channel ARTE describing the incestuous relationships between HSBC and the British government and Monte di Paschi and the Italian one.

Curiously, there is a particular subject that is conspicuously absent from the DIGM debate: controlling the amount of risk covered by the guarantee of deposits by limiting the number of accounts benefitting from the insurance. Limiting the number of accounts covered by insurance is one of the most efficient measures of managing the risk born by the DIGM itself, the EMF as backstop and ultimately the taxpayer.

When promoting the benefits of a deposit guarantee scheme (national or Eurozone-wide), governments and EU authorities emphasise the “social” aspects of the measure, meant to protect the savings of the weaker members of society. Earlier “national” schemes often limited the amount insured to much lower sums than the now Eurozone-wide €100.000 per account, instituted precipitously during the 2007/8 financial crisis in order to forestall a major “run” on the banks. These measures contributed significantly to maintaining confidence in financial markets in general and the banking sector in particular. However, a closer look at the “social” objectives aimed at, point to a distortion of the system to the considerable advantage of the wealthier members of society and of the banks!

Indeed, allowing an individual to benefit from the guarantee for multiple accounts is the privilege of a relatively small segment of the population who own deposit/savings accounts in excess of € 100.000. Not only do the wealthy benefit from cumulating the amount protected by the DIGM but they also are able to diversify their credit/currency risks, should the survival of € itself come into question and amounts held on deposit be converted by fiat into devalued new national currencies.

Limiting the number of guaranteed accounts would reduce the risk supported by the scheme and therefore meet the requirements of some of its strongest critics. Each depositor would designate his insured account, the institution concerned transmitting the information to a central registry to avoid duplication. Insured amounts could be modulated increasing, for instance the ceiling by 50% for a married couple and by 25% for each minor child or even lifting the limit to €200.000 for an SME. Private insurers could offer optional cover for additional accounts with premiums adjusted for the credit/currency risks relating to each institution. This would lead to bank mergers contributing to the solvency of the sector, fostering competitivity and reducing fragmentation of the market.

There is an additional strong political reason for limiting insurance to one account: When designing the Capital Market’s Union, one of the Commission’s major aims was to shift progressively the balance of the financing of the economy from the banking sector to capital markets. A leaner DIGM would incite those who have investible funds to look at alternative commitments rather than to “bank deposits, contributing to reach the stated objective.

European “universal banks” banks will strongly oppose these proposals arguing that they stand to lose access to cheap client deposits, thus inhibiting their lending capacity to the economy and increasing pressure on the ECB to be the ultimate provider of bank liquidity. On the other hand, these arguments only emphasise the conflict of interest situation which is created by putting the banks at the centre of the CMU design. Looking at the power of the banking lobby, one can wonder whether refusing to address this sensitive question is not a deliberate quid pro quo exacted, as the price of the banking sector’s cooperation.