The European Commission says fragmented banking is holding Europe back. But after shelving its plans for a common deposit insurance scheme, is it moving the banking union forward or leaving it unfinished? EU Perspectives asked four experts from academia, civil society and the banking industry.
Two weeks ago, the European Commission walked away from one of the longest-standing ambitions of Europe’s banking union. Its new Communication on the competitiveness of the banking sector shelved the 2015 proposal for a European Deposit Insurance Scheme (EDIS).
EDIS was designed to protect savers identically in every member state, so that a deposit in Romania, Ireland or Germany carried the same guarantee, backed by a common European fund rather than a national one.
Instead, the Commission has replaced it with a plan that keeps each country’s deposits separate, promising only closer cooperation between national schemes. “Getting capital flowing is how we will get Europe growing,” said Commission President Ursula von der Leyen in the announcement.
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The unfinished banking union
EDIS was the third and most contested pillar of the banking union, alongside single supervision and single resolution. It was also never adopted. As pooling deposit protection means pooling the risk, creditor states led by Germany refused to underwrite the failures of weaker banking systems elsewhere.
Its absence leaves intact the “doom loop” the project was meant to break: because deposits stay national, a banking crisis in one country still lands on that country’s own government. And the fragmentation that keeps deposits national is also what caps pan-European growth.
To make sense of the Communication, and what its EDIS decision means, EU Perspectives spoke to four financial experts who have followed banking union from the inside: Nicolas Véron of Bruegel and the Peterson Institute; Julia Symon, Head of Research and Advocacy at Finance Watch; Rebecca Christie, Senior Fellow at Bruegel; and a senior figure in the European banking industry, speaking on background.
What emerged is largely agreement: on fragmentation as the problem, and on capital relaxation as the wrong answer. They differ, however, on what completing the job would take, and whether Europe has the will to do it.
The fragmentation challenge
The area of greatest consensus is surrounding the Communication’s central claim: that the biggest obstacle to a competitive European banking sector is national fragmentation.
“The Commission correctly put emphasis on the fact that the main problem for competitiveness of the European banking sector at this point is the market fragmentation,” Mr Véron says. “That analysis is fundamentally correct.”
For Ms Symon, Finance Watch’s verdict is that “the Commission has made a great diagnosis, but has not proposed the right solutions”. According to her, the debate has drifted from its original purpose—how the banking sector can finance the real economy—toward “simply thinking about how we can make sure that our banks are as profitable as American banks”, with the connection to productive investment becoming “less and less evident”.
“You couldn’t fail a bank even if you tried”
“If we don’t take this seriously, it will be a slow death in Europe,” says the industry source.
European banks, they argue, are already so heavily armoured that demanding more capital is pointless. The Single Resolution Fund holds more than €80 billion in private money; combined with national deposit guarantee schemes, coverage exceeds 2.4 per cent of covered deposits, which is almost double the United States. Loss-absorbing capacity (MREL) averages around 35 per cent. “You couldn’t fail a bank even if you tried to do it,” the source says.
“The only real problem we have is confidence,” the source argues, “because we don’t have a lender of last resort,” they continue. The Commission’s promise to merely “investigate” liquidity in resolution is, they say, far too weak. The European Central Bank (ECB) should stand behind banks in a crisis the way the Fed and the UK Treasury do, as a signal to markets, without public money necessarily ever being spent.
On EDIS itself, the industry read is pragmatic: after three failed attempts in twelve years, all rejected by the Council, dropping it was the only reasonable choice. “If you propose something about EDIS again and it is rejected and delayed, delaying the whole banking package (…) you risk having nothing,” the source says.
But beneath the pragmatism, the source believes, is something more concerning: institutional cowardice. Europe, the they argue, has bred a class of “risk-mongers” — supervisors, authorities and NGOs who, in the source’s words, “all agree in doing nothing” and are well paid to treat caution as a virtue while competitiveness suffers.
But would cutting capital even work?
Even if banks are well-capitalised, would relaxing those requirements actually make them more competitive? Both Mr Véron and Ms Symon argue it would not.
“It’s purely banking lobby rhetoric,” Ms Symon says. “We have not seen evidence in the past that anything in the prudential rules was a profitability factor.” Relaxing capital, she argues, buys a one-off bump in lending and then leaves banks weaker when the next shock hits: “In a period where you have stress (…) you are very much constrained because your capital is small.”
“The banks are very short-sighted,” Mr Véron says. “They look at the next quarters, (…) they say, if you could ease capital requirements, we would make more money, and we call that competitiveness,” he continues.
His verdict is that “capital requirements are fine, they’re a little bit too complex, there is a need for simplification, but there is not a need for radical change”.
The scale problem
The clearest test is a European champion like Airbus which is financed as much as 80 per cent by Japanese and Chinese lenders that face roughly half the capital charges. Industry argues this is a result of the fact that heavy requirements are handing strategic business to foreign rivals.
“It has nothing to do with implementing or not implementing Basel (minimum capital requirements for financial institutions),” Ms Symon says. European banks lose these deals because they lack scale, she asserts: “They have nowhere to grow into: the market in Europe is fragmented.”
And she argues, many scaled down and exited business areas after the 2008 crisis while American banks invested in technology and people. Capital rules “will impact the calculation, but it’s not really the biggest factor,” she added.
For Ms Symon, the pressure that led to the communication was not uniform, but the result of differentiation by national banking model, which is precisely why it becomes irresistible.
“For France and Spain, they have big investment banks, so for them the Fundamental Review of the Trading Book is important. Then you have many smaller regional banks in countries like Germany that have a lot of lending to small and medium enterprises which are unrated (…) In the end, we have different commercial interests. (…) This is why you get all the concessions to the banks.”
“Banks can earn their profit (…) but they should earn it in a way that does not come at the expense of public interest, because in the end, if they are fragile and they fail, it’s going to be on all of us,” says Ms Symon.
The grand EDIS bargain
Mr Véron argues there is “a deal out there in which everybody gets enough”. But it is a grand bargain, that requires all coming to the table.
“For Rome, it doesn’t make sense to concede on sovereign exposures if you don’t have a genuine European deposit insurance,” he says. “And for Berlin, it doesn’t make sense to concede on deposit insurance if you don’t have something on sovereign exposures,” he continues.
He points to the ECB’s approval of UniCredit’s move on Commerzbank, over German objections, as proof integration delivers: “It’s pretty obvious that if that transaction’s authorisation had been in the hands of a national authority, for example BaFin, it probably wouldn’t have been authorised the way it has been by the ECB,” he says.
Mr Véron does appreciate that the Communication acknowledges the need to tackle concentrated domestic sovereign exposures. He called it “a critical consideration” the Commission had never previously put on the agenda.
The EDIS retreat represents an internal contradiction for Mr Véron. “I’m unconvinced that you can stop midway,” he says. “The debate is really whether you want to finish the job or not.”
“In a way, it contradicts what they say on sovereign exposures,” he says. In the last round of negotiations, he notes, Italy, “as a proxy, it’s of course more member states”, was “very firm in its unwillingness to settle for half a deal on deposit insurance.”
Ms Symon argues you cannot move on banking union unless every pillar moves together. On EDIS, “without it, it will not work,” she says, “but only with it, it will also not work.”
What happens next
Formal proposals are due in the first quarter of 2027, and the outstanding question is whether the ambition on fragmentation survives into the legislative text, or will the banks’ just get their short-term wins.
“A big concern is the possibility to have a competitiveness mandate for the supervisors, which has nothing to do with supervision. It’s a business matter,” Ms Symon says. “We think that undermining regulation and supervision simultaneously would be very dangerous, and we [Finance Watch] will be vocal on that.”
Unless deregulation is matched by genuine integration, she warns, “this whole agenda will simply be empty and basically just deregulation”.
Ms Christie is more hopeful. “The best news about the Commission communication is that banking is once again at the heart of the EU policy agenda,” she says. “Liquidity in resolution—making sure troubled banks and their authorities can access cash to avoid sparking contagion—is one area where EU-level action may be able to reduce the risk that national ringfencing will set off a new crisis,” she continues.
But she too offers conditions: “While the exact path forward will depend on what measures win support from Berlin and other key capitals, having top policymakers take another run at the topic is a hopeful sign.”
Now, we wait to see if banking on the top of the agenda entails a Europe that will finish the job.
