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23rd Feb 2024

EU commission wants banking union in 2018

The European Commission is piling on pressure to complete the banking union, first proposed in 2012, by the end of next year, as part of a broader plan to prevent a repeat of the financial crisis.

EU commission vice-president Valdis Dombrovskis told reporters in Brussels on Wednesday (11 October) that the aim, among other things, is to make sure taxpayers are not first in line to pay for a banking crisis.

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"As long as financial ties between banks and their sovereigns remain as close as they are today, there is still unfinished business," he said.

Neither the Council of the EU, representing member states, nor the European Parliament, have managed to reach an agreement on the banking union despite around two years of talks.

The commission is now hoping to speed up the co-legislators by putting forth a series of measures, described by Dombrovskis as "ambitious but realistic" in terms of getting the banking union up and running in 2018.

"We hope that today's proposals will serve as food for thought for the co-legislators," he said.

But the EU commission's ideas appear to water down state access to safety nets and reduce the sharing of banking risks, which may be part of an effort to appease German demands.

First, it is asking co-legislators to adopt the risk reduction measures that had been presented last November.

Second, it also wants to further reduce the share of bad bank loans, so-called non-performing loans (NPLs). Since mid-2014, the share of bad loans have been reduced from 6.7 percent to 4.5 percent.

"We need to accelerate this trend and prevent the stock from building up again," noted Dombrovskis.

The EU executive wants to reach a consensus on a European deposit insurance scheme or EDIS, which would collect funds from banks to guarantee each depositor around €100,000.

The commission is proposing a gradual phasing in of EDIS, as a means of also unblocking talks between the co-legislators. This includes making EDIS conditional on a bank health checks "to confirm legacy issues from the crisis have been dealt with."

It wants a so-called "backstop" or safety net - already agreed some four years ago but not yet operational - to guarantee the stability of the single resolution mechanism, which helps to restructure failing banks.

"As a last-resort tool, this backstop would only intervene after private creditors have born losses," said Dombrovskis.

He noted that support has emerged among eurozone finance ministers in the Eurogroup to use the European Stability Mechanism (ESM) - the Luxembourg-based eurozone emergency fund - as a safety net for a single resolution fund.

The commission is set to follow up on the ESM idea in December, in a separate package on deepening Europe's and the EU's monetary and economic union.

On Wednesday, it also proposed plans to help banks diversify their holdings on sovereign bonds, and issued a report on the single supervisory mechanism.

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