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Central bank head Joachim Nagel signaled that German unease about a prospective takeover of the country’s second-largest private-sector bank, Commerzbank, by Italy’s UniCredit is not ill-placed.
The Bundesbank president, who also sits on the European Central Bank’s Governing Council, pointed in a speech on Tuesday to the trouble in transitioning from a banking system that is still largely organized and regulated along national lines to one that would live under more common European arrangements.
He highlighted two issues that have often been seen as two sides of the same coin. On the one hand, banks typically hold large amounts of sovereign bonds, especially those issued by their home government. On the other, if they run into trouble, their depositors are protected by national deposit guarantee schemes.
This combination means that the actual safety of bank deposits is in practice inseparable from the solvency of an individual government: a government default, as nearly happened with Greece and others a decade ago, would simultaneously bankrupt much of a country’s banking system.
That risk is especially pertinent in Italy, where gross public debt stands at 135 percent of gross domestic product, more than double the EU-recommended ceiling.
To compare, Germany’s stands at a mere 64 percent. Meanwhile, over one-third of the €108 billion in sovereign bonds UniCredit holds are Italian.
ECB president Christine Lagarde reminded the European Parliament on Monday that a European Deposit Insurance Scheme, which was hoped by many to be the means of ending this fateful ‘bank-sovereign’ nexus, has been blocked for years by national governments and remains “desperately missing”.
“I very much hope that within the Eurogroup … that matter can be pursued,” she noted.
In his speech on Tuesday, Nagel again made the point that the combination of a European deposit insurance scheme with banks still highly exposed to their home governments “could lead to a redistribution of sovereign solvency risks.”
Nagel has proposed adding a “European layer” of insurance over the national one, which would leave national schemes still in line to absorb most of the damage from a national sovereign debt crisis, but would create a limited European backstop to stop it spreading across borders.
“In my view, the new EU legislative session provides a good opportunity to move forward on both issues,” Nagel said, “with a reduction in banks’ exposures to individual sovereigns, and a common European deposit insurance system.”
Nagel’s proposal, which echoes a similar one from his French counterpart François Villeroy de Galhau, has faced resistance from the powerful German savings bank lobby, which still sees it as a step toward putting its customers on the hook for wasteful borrowing and spending by past Italian governments.
Nagel and his predecessor Jens Weidmann campaigned for years for the greater riskiness of some national government bonds to be reflected in their accounting treatment. However, under the Basel 3 accords, EU banks are allowed to assign a zero risk weight to eurozone government debt, signifying no effective risk of default.
