EU leaders should support cross-border bank mergers to make the banking union more resilient, European Commissioner for Financial Services Mairead McGuinness said on Tuesday (25 June), warning that recent changes to proposed deposit insurance rules risk undermining the very foundations of the union.
Speaking at Bruegel, an EU policy think tank, McGuinness said EU leaders should step up efforts to complete the EU banking union, launched 10 years ago, by supporting the integration of EU banks across member states.
He called on policymakers to overcome remaining “banking nationalism”, which he said was a major obstacle to further integration in Europe’s banking sector and holding back vital investment and economic growth.
“The merger will make banks more resilient to shocks through diversification of assets and will enable European banks to have more efficient business models, pursue their growth strategies and invest in digitalisation. [and] “Cybersecurity is a topic that will always require investment,” McGuinness said.
Cross-border mergers would also leave EU banks “better equipped to compete with non-European banks”, she added.
But McGuinness warned that any such cross-border integration must be combined with “appropriate safeguards” to ensure financial stability in Europe, and stressed that small banks would continue to play a “vital” role in the European economy.
The commissioner’s comments come amid growing calls for EU policymakers to help European companies “scale up” so they can compete with their US and Chinese counterparts.
In a much-discussed report published in April, former Italian Prime Minister Enrico Letta highlighted the “staggering size gap” between EU companies and their US and Chinese competitors, particularly in the financial services, telecommunications and energy sectors.
Mario Draghi, another former Italian prime minister commissioned by the European Commission to prepare a report on the future of the European Union’s competitiveness, has similarly emphasized the “crucial” importance of scale in several recent speeches, and most analysts expect his study to go into greater depth about how to achieve this in a European context.
“We are taking advantage of the fact that our main competitors are continental economies to increase their size, to increase their investments and to gain market share in the most important industries,” Draghi said in Spain earlier this month.
“In Europe we have the same natural advantage of scale, but fragmentation is holding us back,” he added.
Council amendments to deposit insurance proposals risk ‘renationalising’ banking union
McGuinness also spoke about how banking nationalism has hindered progress on one particular policy file for the banking union, the Crisis Management and Deposit Insurance (CMDI) Framework.
Proposed by the European Commission in April 2023, about a year after being called for by eurozone finance ministers, the CMDI aims to improve the resolution process for failed small and medium-sized banks and, in particular, to protect taxpayers and depositors in the event of a bank failure.
While McGuinness welcomed the European Parliament’s position on the CMDI file, agreed in April this year, as making the framework “more predictable and effective than it is now”, he criticised the Council’s proposed amendments, published last week, as “frankly very disappointing”.
In particular, she noted that the Council’s proposals would make it harder for banks to access the Single Resolution Fund – an additional emergency fund financed by private institutions that would only be triggered if a bank’s own investors had already suffered losses equivalent to 8% of the bank’s total liabilities.
She warned that this risks incentivising member states’ financial authorities to “continue to use their own instruments” outside the EU resolution framework, including taxpayer-funded bailouts.
McGuinness also noted that “many” of the extra rules proposed by the Governing Council would apply only to the member states of the banking union, which includes the 20 eurozone countries and Bulgaria, which he said would “increase the gap between member states inside and outside the banking union” and make the union itself “less attractive.”
Overall, the Commissioner warned that the Commission’s position, by renationalising parts of the banking union, represents a “backwards step” in some respects.
More specifically, she said the Council’s proposals would “weake” the EU’s “strong and independent” Single Payments Board (SRB) by expanding the powers of the General Assembly, made up of national payment authorities, at the expense of an Executive Board made up of independent directors.
“Unfortunately, the Council’s negotiating stance suggests that member states are approaching this reform mainly from a domestic perspective, without taking into account what is best for the banking union,” she said.
“Banking nationalism has not disappeared, it may be being reinvented. So this is an issue that we need to overcome and address,” she added.
McGuinness’ warning was echoed by French economist Nicolas Véron, a senior research fellow at Bruegel.
“Banking nationalism and state financial repression remain prominent in the way many European policymakers think about their economies and financial systems,” analysts wrote in a book published on Tuesday, warning that the tendencies remain “a major obstacle to the completion of banking union.”
[Edited by Anna Brunetti/Alice Taylor]
