European banking union needs its final leg

    Please use the sharing tools found via the email icon at the top of articles. Copying articles to share with others is a breach of FT.com T&Cs and Copyright Policy. Email licensing@ft.com to buy additional rights. Subscribers may share up to 10 or 20 articles per month using the gift article service. More information can be found at https://www.ft.com/tour.


    9 MINUTES AGO by Lorenzo Bini Smaghi
European banking union has been an important step forward in the implementation of a fully functioning economic and monetary union. But it remains incomplete. The first two legs — the Single Supervisory Mechanism and the Single Resolution Fund — have been realised, but one is still missing: the European Deposit Insurance Scheme. Several proposals for the third leg have been put forward, but little progress has been made.

A widespread view is that no advance can be made on the EDIS until the issues related to banks’ legacy assets are addressed. In particular, banks in peripheral eurozone countries would need to reduce the large amount of non-performing loans and government bonds that they still hold. Otherwise, the argument goes, the scheme would mean that depositors and taxpayers in the northern countries would have to share the risks accumulated by southern banks before the crisis.

Furthermore, premature introduction of the scheme could create moral hazard and reduce the pressure on banks and their national regulators to dispose of these assets and clean up their balance sheets.