EU-wide bank deposit scheme: neither politically feasible nor credible
June 2, 2012 8 Comments
With the risk of a bank run in the EZ rising, there has been talk amongst EU policymakers of creating a European-wide bank deposit guarantee scheme. Over the past week, members of the European Commission and ECB president Mario Draghi have all spoken out in favour of such a scheme. This would be a form of fiscal union through the back door and therefore a step in the right direction for the EZ, but it is very unlikely to be politically feasible or credible.
Though European policymakers are in favour of a European-wide deposit guarantee scheme, Germany most certainly is not. Even if the German government were willing to sign Germany up to backstopping bank deposits in the southern European countries, the German Constitutional Court would find it illegal on the basis that Germany’s financial exposure would be unlimited in nature.
To get around this problem, a cap could be placed on the European-wide bank deposit guarantee scheme, with only deposits up to a certain level guaranteed. If the cap is not high enough—and history has shown that in the EZ crisis response, the figures are never high enough—then it would most likely exacerbate a bank run as depositors rushed to withdraw their cash above the established threshold.
Even if an unlimited European-wide bank guarantee deposit scheme were politically feasible, it would probably lack credibility. Total EZ deposits amount to roughly €15 trillion. The European bailout funds—the EFSF and the ESM—together total €0.5 trillion. Granted, not all deposits will need to be guaranteed as we are very unlikely to see a bank run in the likes of Germany and Finland. But still, the gap is sufficiently large to make anyone skeptical that an unlimited deposit guarantee scheme really could backstop all EZ deposits. The only way this gap could be filled is if the ECB were willing to print a wall of money to plug the hole. As I have argued several times already, it is extremely unlikely the ECB will fire up the printing presses in an unlimited fashion.
More importantly, depositors are withdrawing their money from peripheral EZ banks because they are concerned about their savings being redenominated and devalued away should their country exit the EZ. A European-wide deposit guarantee scheme cannot guarantee against a redenomination.
We have seen that national bank deposit guarantee schemes have failed to stem the “bank jog” currently occurring in the weaker EZ countries. A European-wide bank deposit guarantee would be an improvement, but even if it could be agreed by European leaders, it may on its own still fail to stop a bank run.
Click here for Roubini Global Economics’ assessment of what policy measures will be taken in the event of a bank run in the EZ.
Megan Greene is the Chief Economist at Maverick Intelligence, with a particular focus on Europe. She is also a senior fellow at the Atlantic Council, a columnist with Bloomberg and a senior research fellow at Trinity College Dublin. The opinions expressed here are her own and do not reflect those of any employers. Ms Greene offers a strictly independent voice without a political or investment agenda.
The way to establish such a guarantee is for France & Germany to guarantee that Greece will not be kicked out of the Euro however much it defaults.
The entity giving a blanket guarantee of liabilities needs the power to put an institution out of business if warranted, in its judgement, by credit management liquidity or capital risks. Germany or France or Netherlands should not “reinsure” an entity that guarantees liabilities, unless they are confident that the guarantor entity will be able and willing to take action. That will prevent future bank irresponsibility.
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No more kicking the can down the road. Let me state what everyone already knows but is afraid to say oud loud: There is only ONE way out of this mess – for Europe to dissolve the euro currency and for all nations to go back to their own currencies. While doing so, they also should dissolve the EU as a body of governance and go back to the days of the EEG where European cooperation was solely focused on the main issues: mutual trade and law enforcement. All the rest is BS, and was only born from hidden but deeply rooted feelings of inferiority that European nations seem to have toward the US. Because there really was no need for a single European currency other than European nations being desperate to undo the hegemony of the US dollar. Vanity and pride are NEVER a good foundation to base rule making on. History is full of examples to prove this point.
Unless the European nations will finally let go of their damaging prestige project called “euro” and start making pragmatic decisions based on facts instead of emotions, they will keep dragging the world economy down and bankrupt their own nations in the process. Including the more prosperous ones in the North.
Time to wake up – or die.
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Perhaps we should all recall the root cause of this crisis….
Then there should be a search for redress.
Some clever people came up with an opaque monetary betting system called CDO’s etc. These were rated AAA by some other even more clever people.
Due to a lot of surplus cash, European Banks (and others) invested in these financial documents – one or two of merit the balance not even of junk grade.
Once the curtain came down, the tax payers of Europe were called upon via the incumbent politicians to bail the banks out so as to protect the local economies. The ask was a big ask, and in many cases not very successful as the real depth of the problem to longer to uncover, than the unravelling of the origins of the bad financial .
Would it not make more sense to go back to the originators of the problem, those that benefited from it and have the proceeds claimed back from them. That should be done in a fully transparent way perhaps by asset seizure as is now being done in Cyprus. It would be enlightening to see all the greedy ones who profited at the expense of others. But at the same time, those jumping on the greed band wagon can expect no compensation. When it looks too good to be true then there lurks danger. This second group of people knew of the danger, otherwise they would have behaved in a safer manner as the majority did.
In the tidy up, there is a need to change a few other things as well. Lenders need reins on them so that they are never again able to gamble with depositor’s money. In earlier time a deposit was put down to purchase any financed items. In banking parlance that deposit is the risk money.
The buyer makes the decision and must have a good amount of ownership in it otherwise, the decision will be less sound than it would be with the risk money as the first resort.
Another change necessary, career politicians – in power in nearly every country need to be kicked into touch, and a maximum two terms only be allowed. The fat cat perks should also go. They would then that their behaviour was in the countries interest and not in their own career.