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FSC 2018 – Summaries Panel III

Under the headline ‘From Repair to Vision: Conceptions for a Common Beneficial and Resilient Financial Architecture and Institutional Framework in the EU’ first four impulses were held, and thereafter policy makers and regulators discussed pending issues, how to get out of political blockades and what could be ways to move on. The debate clearly revealed the different positons and views from the repesented member states and institutions.

Financial Stability Conference 2018
31 October 2018
Panel III  –  Impulses
Panel III  –  Discussion

From Repair to Vision: Conceptions for a Common Beneficial and Resilient Financial Architecture and Institutional Framework in the EU

Dr. Elisa Ferreira, Vice Governor, Banco de Portugal
Dr. Jörg Kukies, State Secretary, German Federal Ministry of Finance
Odile Renaud-Basso, Director General of the Treasury, French Ministry for the Economy and Finance
Dr. Rolf Strauch, Member of the Management Board, European Stability Mechanism

Panel III  –  Impulses

Elisa Ferreira started out by appreciating that the setting up of the Single Rulebook in the European Union and the launch of the Banking Union constitute a commendable success of the post-crisis financial reforms. However, the lack of political will to complete the architecture seriously jeopardises its key benefits. Recent cases highlighted a so-called “accountability conundrum”, that is banks are mostly European in life, but remain national in death. While supervisory and resolution decisions are mostly taken at European level, the consequences still lie with taxpayers at national level, with potential serious impacts on national budgets. This ‘accountability conundrum’ needs to be solved, Elisa Ferreira stressed. In view of the existing mismatch between European oversight and national liability, the objectives of the stakeholders involved are not aligned.

This unstable balance prevents economic actors from fully reaping the expected benefits of economic integration. Europe needs concrete plans going forward, and must address pressing questions on what is still missing to safeguard financial stability. Absent a fully-fledged EDIS in the short to medium term, a plan is urgently needed for the interim. This is now even more pressing as time is rapidly lapsing until the next European elections in 2019, she said.

On further topics for debate Elisa Ferreira suggested, firstly, the development of a specific institutional regime to address Member States’ concerns over the risks of potential failures of cross-border banking groups. The absence of much needed tools to address financial stability risks arising from locally systemic undertakings hinders progress on issues such as the adoption of waivers on liquidity and capital and the removal of options and national discretions. Both aspects are closely connected to rethinking the Single Point of Entry and the Multiple Point of Entry resolution models, as the generalisation of the Single Point of Entry model within the BU requires that both concerns at group/home level and subsidiary/host level are addressed. They also connect to the choice between subsidiaries or branches, together with the supervisory powers of host national competent authorities. In this context, the transformation of subsidiaries into branches has emerged as an answer to the host responsibility for covered deposits. This, however, implies, at least, when local undertakings are of systemic relevance to the Member State, that domestic supervisors should have a say in the day-to-day supervision and should have the capacity to react to strategic decisions affecting branches as they would have had had it been a standalone entity. It also implies that national resolution authorities are adequately involved and empowered in the definition of resolution plans and in the resolution action when it occurs.

As a second point, Elisa Ferreira suggested that solutions need to be found for the orderly exit of traditional medium-sized deposit-taking banks without disrupting financial stability. Whereas MREL and bail-in requirements may work for larger banks, there may be no clear room for middle-sized institutions whose business model may be incompatible with MREL requirements, which are institutions that may be of no public interest at EU level, but nonetheless have systemic relevance at local level. Instead of moving immediately towards a further straitjacketing of Member States’ room for manoeuvre with the harmonisation of EU banks’ liquidation regimes, efforts must be made towards the establishment of an enabling framework for the orderly winding-down of locally systemic relevant banks, combining elements of the resolution and liquidation frameworks, while preserving value and protecting creditors and non-financial borrowers.

Possible paths might include the establishment of special insolvency proceedings, with recourse to administrative options, attributing some of the instruments currently envisaged in the BRRD for banks in resolution to a liquidating authority, as an alternative to the atomistic court-led liquidation regime. Another path would be to ensure effective financing of the deposit insurance systems for deposit transfers abiding by the least cost principle with the liquidating authority having the option to offer guarantees or enter into profit and loss sharing regimes. Recent calls to form a sort of European Federal Deposit Insurance Corporation, merging the Single Resolution Fund and EDIS into one single entity, merit attention in this regard in the medium-term, provided that the legal framework is fixed and that financial stability both at European and national level is enshrined as the first and fundamental objective of any intervention. As a final remark Elisa Ferreira concluded that the achievements in terms of the Banking Union architecture are astonishing, but the entire project remains fragile. Europe has stopped moving and currently stands in the middle of a very sensitive and unstable bridge.

Jörg Kukies started off on the note that the stand still is over and at the latest in December this year progress on the Banking Union will have advanced from formerly 50 to then 75 percent of completion. The mandate of the heads of state will be fulfilled in terms of a present set of documents and agreements to deepen Banking Union by firstly passing banking package. This would present a large step towards further risk reduction by implementing a solid regime of MREL both in quantitative and qualitative terms. Another positive development is the agreement on a new regime on how to treat NPLs. Secondly, this will provide the power and confidence to move ahead on the significant step of risk sharing by agreeing on a common backstop for the Single Resolution Fund. On this issue, the positions of France and Germany need additional refinement, but if finalised by December this would allow further progress on the Banking Union and the EU fiscal framework.

Thirdly, to strengthen the ESM by advancing its instruments both in terms of its mandate as well as tools is another important dimension. In many cases during crisis it could be observed that, though being innocent bystanders with sound fiscal policies, some Member States in risk of movements get caught in the middle of a de-risking development in the markets resulting in widened spreads and increasingly expensive refinancing. At present, no real instrument exists to help those states, who through no fault of their own get constrained to follow a pro-cyclical policy. Hence, precautionary conditional credit lines might help to address this problem of unnecessary pro-cyclicality in the European system.

Moreover, a lot of progress is being made on the agreement between Germany and France regarding the French substantial reform agenda as well as on setting up elements of Eurozone stability, convergence and growth. In this regard, the Meseberg agreement earlier this year presented already a substantial step in this direction. In contrast, Jörg Kukies doubted that the home/host dispute as mentioned by Elisa Ferreira will be solved in the short-term. Still, it is very important to find a solution on how to overcome the dilemma that banks in the home countries disapprove of a lack of a common market as well as ring-fencing and excessive segmentation along MREL, capital and other dimensions while host countries, equally legitimately, criticise that the banking system is very European under good conditions, but quite national in situations of distress. The empirics are very sound on both perspectives, but so far no solution has been found to address these very legitimate concerns of both the inefficiency of the European banking system and the concern about macroeconomic spillovers. Finally, Jörg Kukies stressed the importance of the Capital Markets Union. The lack of private sector shock absorption in Europe, which in turn exists in the US, is due to the fact that of the 17 proposals by the European Commission on the Capital Markets Union only three have been completed in four years, which makes for a rather unfortunate track record.

Odile Renaud-Basso shared some of the optimism by Jörg Kukies and noted that a lot has been done to enhance the euro area capacity and appropriate tools to deal with the crisis, especially in view of building the ESM and the large progress already made on completing the Banking Union with a functioning SSM and the Single Rulebook. While in Europe there is often a self-defeating perspective on this progress, these accomplishments stand for themselves, even with further things on the agenda. The upcoming banking package will be finalised in December and it strengthens the ESM by enlarging its role and creating precautionary instruments. Overall it will help to face future crises in a preemptive manner. In this regard, the proposal by the French president included the objective to create a Euro area budget with its own fiscal capacity, which has important long-term effects for financial stability, growth and convergence. Such a political element is important to ensure unity and strength of the Euro area.

While the elements of the Banking Union are key, it appears that the progress is currently stuck in the middle. Many obstacles and national concerns remain and impede on the functioning of the Banking Union, such that fragmentation is now more of an issue than it was before the crisis. A recent figure as highlighted by the ECB president stated that 130 billion Euro of liquidity is being ring-fenced at the national level and cannot be allocated across the Banking Union. This leads to the absurd situation that while supervision responsibilities were transferred to the EU level, market actors cannot fully take advantage of the Banking Union‘s benefits. This is an unsatisfactory situation, firstly due to economic reasons. More integration in terms of risk sharing and risk reduction actually is a source of financial stability. Therefore, to alleviate barriers and facilitate capital and liquidity flows as well as consolidation in the banking system would be much more efficient to reach the overall aim of financial stability. Secondly, regarding the efficiency of the European banking system, there are structural problems of efficiency, productivity and size, especially when compared to the US. As the banking system has the particular role of financing the economy, and given a system that is not functioning properly, then it is detrimental for financing companies and SMEs.

In conclusion, Odile Renaud-Basso warned that if the EU does not manage to tackle the remaining obstacles, it would jeopardises its political support. Since being caught between two worlds, the national and European, is no positive position to be in, solutions are needed to make practical progress especially on the discussion regarding the home/host issue and EDIS.

In the light of the optimism so far raised by the panel, Rolf Strauch opened his impulse by suggesting that the repairs put in place after the crisis have helped a lot to achieve a more robust euro area. In this respect, the Banking Union – including the Single Supervisory Mechanism and Single Resolution Board – as well as the ESM constitute two quantum leaps. The ESM is the Lender of Last Resort for Euro area countries that lose market access or risk losing it, the function of which did not exist in the Euro area before 2010. In addition, many other policy decisions helped to overcome the crisis such as structural reforms at the national level that were the most notable. As a result, the economy of the Euro area is thriving again and its institutions are much stronger than before the crisis.

Going forward, the European agenda encompasses more tasks to complete the strengthening of the euro area and make it more robustness to better be able to withstand the next crisis, especially in terms of the Banking Union and Capital Markets Union being in place to ensure better private sector risk sharing. As mentioned by the ECB president, a well-functioning banking market already is risksharing in itself, as it facilitates cross-border flows. A public backstop for the Single Resolution Fund is one step to complete the Banking Union. It has been agreed that the ESM will provide a credit line, to make the Single Resolution Fund more robust. Common deposit insurance for Europe is a more ambitious goal, given the current lack of trust between countries. Such an insurance, however, is a crucial plank of the Banking Union and would help to prevent bank runs during a crisis. Before it can exist, it is essential that banks reduce problem loans dating back to the crisis, and build up more shock-absorbing buffers to protect taxpayers.

Strengthening the role of the ESM is not a goal in itself, but a number of new tasks to make the Euro area more resilient could be given to this institution, which has built up important expertise during the crisis, in areas such as debt sustainability and market access. In addition to the Single Resolution Fund backstop, it is envisaged that the ESM plays a more prominent role in future assistance programs, together with the European Commission. Europe has built up enough expertise to no longer have to rely on the IMF as much as it did at the start of the crisis. The continent is rich compared to other regions, and other regions expect Europeans to use its own rescue fund. Stronger ESM involvement would require that the ESM is wellinformed about all Euro area countries in normal times to be prepared for a crisis situation. Overlap between the European Commission and the ESM will be avoided and that their legal competences are fully respected. Politicians are also revisiting the toolkit of the ESM, where only two out of the six instruments have ever been used. The precautionary credit line is a useful tool to prevent a crisis from getting out of hand and leading to a bigger financial assistance programme. Finally, the ESM could facilitate negotiations between creditors and debtor in a sovereign debt restructuring, if Member States wanted to set up a framework to that end. At last, Rolf Strauch suggested that the Euro area could agree on a fiscal capacity for macroeconomic stabilisation in the long-term. The ESM could also play a role here, for instance by providing short-term loans, with lighter conditionality than in regular programs. Such a major decision, however, will probably not be achieved in December.

From Repair to Vision: Conceptions for a Common Beneficial and Resilient Financial Architecture and Institutional Framework in the EU

with Dr. Elisa Ferreira, Vice Governor, Banco de Portugal; Dr. Jörg Kukies, State Secretary, German Federal Ministry of Finance; Odile Renaud-Basso, Director General of the Treasury, French Ministry for the Economy and Finance; Dr. Rolf Strauch, Member of the Management Board, European Stability Mechanism; Emiliano Tornese, Deputy Head, Resolution and Crisis Management Unit, European Commission, and Visiting Professor, College of Europe in Bruges; moderated by Nicolas Véron, Senior Fellow, Bruegel and Peterson Institute for International Economics

Panel III  –  Discussion

Nicolas Véron initiated the panel by acknowledging this conference to be an important opportunity for the financial community to gather and discuss crucial stability issues. In reaction to the previous impulses, Emiliano Tornese agreed that great progress has been made in the European institutional framework, for instance in terms of the Single Rulebook as well as the banking package including MREL, so that the glass can be regarded as rather full than empty. Patience on further progress will pay off and various road maps already exist that are consistent with each other and try to repair the system for the better. “We should not forget about the vision of the Single Market for the banking system.” Nonetheless, other issues are pending such as national discretions and options, the need to look at insolvency law and taxation related to the Capital Markets Union, the problem of ring-fencing on liquidity and capital and the associated deficiency it creates in the market. As a solution, part of the architecture has already been created with the SSM, ESM, proposals on EDIS and the discussion on the backstop of the Single Resolution Fund.

From the previous impulses Nicolas Véron summarised that the panel identified the three aspects of solving the home/host issue, EDIS and sovereign exposures as crucial to frame the agenda of completing the Banking Union. In turn, EDIS helps to resolve the home/host issue, because as long as there are national deposit insurance systems it is difficult to completely get rid of ring-fencing and thereby the home/host issue. Jörg Kukies agreed that these three dimensions are closely linked. While the concept of a common deposit insurance is fine, the question on the economic difference between agreeing on a common backstop or on a fully mutualised common deposit insurance across Europe remains, since the required risk reduction measures vary strongly between the two options. Risk sharing through the common backstop would be in line with the German constitution and include an appropriate level of risk reduction, Jörg Kukies si. Another advantage is the possibility for intervention through veto rights in case of bad policy or uncooperative behaviour from other Member States. In contrast, with EDIS a case by case decision is not possible by definition. “There is no consensus at all in Germany that the level of governance and risk reduction required allow moving ahead with EDIS.”

On the closely linked issue of sovereign risk, Jörg Kukies considered uneconomic incentives not to be adequately addressed given zero risk weights on sovereign exposures on bank balance sheets, which further impedes progress on EDIS. Nicolas Véron identified the two legacy items of NPLs and sovereign exposures as problematic from a German perspective. Nonetheless, while risk reduction on NPLs is sufficient to promote the common backstop, more risk reduction is needed on sovereign exposures before moving forward on EDIS. Jörg Kukies responded that EDIS required a much broader progress instead of a declining path of NPLs that is very differentiated across Member States and within banks. Nicolas Véron opposed this with the European perception of Germany moving the goal post on risk reduction making it all the more difficult to come to an agreement on EDIS. Reiterating that risk reduction was already enough to agree on a Single Resolution Fund backstop, he asked what specifically is needed for EDIS to be possible. Jörg Kukies assured that it is crucial to have a firm goal post with a framework that precisely defines the amount of risk reduction necessary to move ahead on feasible topics, as has been done with MREL, NPLs and insolvency regimes. A small but not insignificant step towards sovereign risk was made by a proposal on single-limb collective action clauses. At the moment, however, a large number of Member States is not even willing to have the discussion on sovereign risk on the balance sheets of banks, let a alone find a common solution or framework, which poses a great barrier. Nicolas Véron insisted as to whether the discussion on EDIS and the home/host issue could be unlocked, if the taboo of sovereign exposures was broken, enabling a solution that then could be combined with further progress on the reduction of NPLs. Jörg Kukies replied that the 2016 EcoFin Roadmap already addressed and defined the related topics of bail-inable capital, NPLs, insolvency and sovereign risk.

In response, Elisa Ferreira suggested that negotiating the amount of progress made on the Banking Union or EDIS in terms of percentages was misleading. “Does it function as a whole or not? In order for it to work the third pillar of EDIS is needed.” In the ongoing progress on NPLs, MREL and sovereign exposures among others realistically one cannot expect countries to remove waivers and to be exposed. Even by moving from subsidiaries to branches, the impact on the stability of the host country remains the same given a systemic branch. Some elements of the framework need to be refined, but for the time being a lot of effort has been dedicated to create this system, she said. In view of potential shortcomings, the overall vision as well as wish list might have to be adjusted according to what is actually feasible. By comparison, the US Federal Deposit Insurance Corporation, which started with a guarantee of deposits and an open credit line into the treasury and thereby managed to resist eight years of crisis, served as an inspiration for EDIS.

Elisa Ferreira critically remarked that agreeing on establishing the three pillar system in the first place, required a firm commitment to ultimately implement all of them and not to complete the first two pillars while putting an unrealistic conditionality on the last one. Nicolas Véron challenged that until June 2018 there had not even been a declaration by the European Council to have EDIS at all, whereas Elisa Ferreira responded that several earlier statements from the Eurogroup president and the ECB proved otherwise. The original conviction was that for the three pillars to go together, but instead of claiming to finish the Banking Union in vain, the agenda might have to be reframed. It is important to understand the sequence and to be frank about what can be expected under the current situation of being stuck in the middle, she pointed out.

Odile Renaud-Basso shared the notion of being stuck in the middle, particularly on the home/host issue and on EDIS. “The political endorsement on EDIS was ambiguous since the beginning.” Instead of viewing EDIS as one single scheme, there are different possible approaches, such as a phased approach as put forward by the Commission. For instance, with a first phase of a purely liquidity-based support the required level of commitment and risk sharing would differ a lot. Then there are arrangement schemes as well as the option of full mutualisation. Moreover, Odile Renaud-Basso noted that surprisingly the Financial Services Compensation Scheme was perceived as the main risk related to EDIS while there are various other risks such as in case of full mutualisation. A particular issue is that smaller banks might go into liquidation using a deposit guarantee scheme while being supervised not by the SSM directly, but by national authorities. For full mutualisation it has to be insured that all kinds of banks, including the smallest ones, are treated with a single methodology of the Single Rulebook.

Even in the light of the problematic bank-sovereign doom loop, for Europe to move alone on starting to weight sovereign risk, which is not done at the international level so far, could thereby put the European banking sector at a competitive disadvantage. On this, Jörg Kukies disagreed, as avoiding the home bias zero risk weight allocation to sovereign debt might actually help to stabilise European banks. Nicolas Véron confirmed that such a home bias was merely a European issue and while the way of addressing this issue should not put EU banks at competitive disadvantage it might be a much more questionable premise to negotiate a solution to this problem on a global level. Odile Renaud-Basso went on to mention alternative solutions such as a more indirect measure of price contributions to EDIS in relation to levels of concentration risk as put forward by the ECB president. In any case, measures against sovereign risk is a sensitive issue in terms of its market impact and it cannot be put on the table without a phasing in approach for which questions of timing and conditions are very important.

Nicolas Véron highlighted Elisa Ferreira‘s previous statement saying that decisions made even before the creation of BRRD were based on the motivation to adopt the US Federal Deposit Insurance Corporation system. That is, the European resolution strategy stems from observations of what has worked in the US. Hence, the question is whether EDIS can function in a steady state without being too similar to the US counterpart, that is without deposit insurance and resolution authorities within the same institution. Jörg Kukies noted that the Federal Deposit Insurance Corporation is an extremely interesting case study, but it remains to be determined whether a similar setup works for Europe. It is, however, not an entirely centralised institution, but leaves the states with a lot of regulatory and supervisory authorities as long as things are going well, and otherwise the Federal Deposit Insurance Corporation steps in. However, the grass is not always greener on the other side and the US might not present the perfect model given that it entails interdependencies, at times contradicting authorities and rules sets as well, Jörg Kukies said.

With a view to the three pillar structure of the Banking Union, Rolf Strauch noted the US Federal Deposit Insurance Corporation had the credibility and deep conviction to ensure and state that no insured depositor will lose money. “This kind of reassurance is the ultimate vision that one should have for the European Banking Union.” From a crisis management perspective, that Banking Union was necessary to make monetary policy effective again during the crisis and thereafter, albeit still being incomplete. It is important to acknowledge that there is clear evidence for the European system being much stronger by now.

In addition, Jörg Kukies expressed concern about an over-obsession with EDIS as the only solution to existing problems given its relative importance. Without challenging the three pillar structure, such a narrow focus ignores the enormous progress made thus far, for instance that all Member States are required to have a deposit insurance by now. If the common backstop and MREL are completed quantitatively and qualitatively, then there should be sufficient funds to protect tax payers and depositors. One should not underestimate the amount of buffer behind banking risk and deposit takers due to the already made efforts. Odile Renaud-Basso agreed that it is exaggerated to claim that without EDIS no progress at all would be possible on ring-fencing liquidity and capital, especially when European supervision is guaranteed namely by the SSM, the Single Resolution Board and the Single Point of Entry resolution among others. Depositors should trust in supervision to take all the necessary steps to prevent a liquidation scenario. Saying that EDIS is the only solution implies that liquidity support does not help and that it requires full mutualisation, which, however, is not feasible at present. Emiliano Tornese suggested that it is always about the alignment between control and liability. Instead of having a piecemeal approach on whether EDIS is needed or not, one has to keep in mind the overall and final vision. On this basis one might do some reverse engineering while working on all the elements such as to create the right synergies in the internal market and also to put the right incentives in place to avoid moral hazard. Using the already existing synergies in the market to unblock ring-fencing on liquidity is already a form of sharing and managing risk within the banking system.

Nicolas Véron pointed out that Germany, the Netherlands and Finland declared that they would not pay for legacy risk that is associated with past national supervisory failure. On the contrary, with resolution decisions and potential supervisory failures at the European level, it is not sustainable to ask Member States to support the financial liability. This reversed legacy argument is very powerful. However, with almost four years of SSM supervision it is less and less the case that the current risk in the system is a legacy of past national supervisory failure. Hence, Nicolas Véron asked how much urgency there is to align liability and control. Emiliano Tornese replied that there is still the issue of small banks and the SSM is already working on it with national supervisors, who are closer to the banks. Still, EDIS and a plan of how it will look like is needed. The Commission has made the proposal envisioning full mutualisation at the end of the process, but there is also the option of progressive mutualisation bearing in mind that the legacy issue is another problem. Emiliano Tornese reiterated that the right incentives were needed to deal with moral hazard and to avoid that the public sector pays in the end.

Returning to the question of whether the EU resolution model was essentially inspired by the US, Emiliano Tornese replied that the EU system was agreed upon at international level, since banks essentially act on a global level. Hence, the first objective was to set the standards for an effective resolution regime in accordance to the Financial Stability Board translating into BRRD with the same principles as its US counterpart. In relation to BRRD, Elisa Ferreira added that it played a major role, because it introduced bail-in as an instrument. However, the problem of BRRD is not its substance or the general framework, but the detail that eight percent have to be bailed in before the Single Resolution Fund can be accessed. This was supposed to protect the fund against any abuse. In comparison, US institutions never bailed in either covered or uncovered deposits and do not impose the condition of such huge amounts of bail-inable capital. If such a relatively massive bail-in was required for banks that have not sufficient bail-inable capital due to their business models, this would create a serious problem of systemic stability. Systemic banks were always addressed as the source of problems, but if a tiny bank bailes in deposits, it would trigger a systemic crisis.

The first remark from the audience referred to the resolution case of Banco Popular assuring that at no point in time the Portuguese subsidiary was considered to be excluded from the resolution measures. The stability of the resolution regime requires that there is certainty in terms of how losses are going to be absorbed and how entities are recapitalised. Moreover, as the Single Point of Entry resolution strategy presents a technical fix to the home/host issue, a further question was on whether there was a fundamental distrust in the Single Point of Entry resolution strategy or whether the political debate was more focussed on calibration issues, such that home countries want more certainty than host countries are willing to offer. On the Banco Popular case, Elisa Ferreira posed the counter question of what would have been done under liquidity pressure given that the central body had dragged out all of the liquidity from the Portuguese subsidiary. Resolving Banco Popular benefitted from having a buyer, but if the buyer had not taken the Portuguese subsidiarity on board it would have been very problematic. With such large subsidiaries or branches, financial stability in the home state has to be guaranteed not only as a matter of judgement of the resolution board, but also as a condition of the resolution strategy. At times the interests of the shareholders, the board and the resolution board diverge from what is needed in terms of stability in the home or host state.

On the Single Point of Entry strategy, Emiliano Tornese replied that it might work as long as there is a single umbrella as in terms of supervision, resolution, deposit protection, backstop, liquidity in resolution or safe assets. Rolf Strauch added that there is a need for further progress on the measures such as MREL and the national deposit schemes in order to increase trust in the resolution framework. Moreover, Odile Renaud-Basso agreed that there was not sufficient trust for a Single Point of Entry resolution strategy and that frankly such resolution procedures entail learning by doing experiences, as was the case with liquidity in resolution with Banco Popular. Jörg Kukies noted that in view of Single Point of Entry strategies cross-jurisdictional issues are not only matters of trust, but also pose the question of legal substance and Europe‘s inability in the past to harmonise insolvency regimes. The question is how many different insolvency regimes there are guiding the resolution of banks that fall under national insolvency laws.

Relating this issue back to Germany‘s position on EDIS, Nicolas Véron asked how much harmonisation of insolvency laws and progress in other areas is needed to move on with EDIS in order to dispel the alleged German pattern of moving the goal post and to close a potential gap of perception. According to Jörg Kukies, the harmonisation issue might constitute a bottleneck in the EDIS debate, but given that EDIS is so vague and far off in the future, it is more important to focus on a firm goal post for short-term reforms. As long as there is not even the willingness to engage on key topics such as the sovereign exposures, a more concrete statement of imminent progress on EDIS, which is a complex and multi-staged process in itself, is not possible. Without a concrete discussion on EDIS, there are no reasons for clarifying and claiming precise necessities for it.

Another question from the floor asked whether, given the lack of mutualisation and solidarity in the European framework, there was a misconception as to the extent of which EDIS is public money. Odile Renaud-Basso pointed out that EDIS is financed by banks‘ contributions, which is backed by the government only if those contributions are insufficient. This is why liquidity arrangements may present a useful solution, as this would entail automatic support from the other national deposit insurance schemes instead of support from the government. It might also be a step in the right direction, since this option does not rely on a full mutualisation, but the respective amounts are paid back by the banking system of the respective country over time. Elisa Ferreira noted that while EDIS is based on banks‘ contributions, it is still classified as public money, because it is done on the basis of a law. EDIS triggers bail-in as well as state aid, and thereby the state aid regime has to be compatible with the overall objective. Emiliano Tornese highlighted that ideally EDIS is not to be used, but to provide confidence. Along these lines, Elisa Ferreira acknowledged that EDIS is symbolically important to generate trust in the markets. Nevertheless, there are many preconditions for EDIS to practically function, such as addressing specific problems of how to deal with cross-border operations in terms of subsidiaries or systemic branches within the Banking Union. Such conditions need to be re-assessed. The other issue refers to infected middle-sized banks that are very relevant at the regional instead of supranational level. Up until now, discussions on the orderly winding-down of such banks are more theoretical than real and corresponding BRRD characteristics have to be fine-tuned. Overall, future risks might not necessarily originate from NPLs, but rather from prospective bad governance inside certain banks, FinTech or shadow banking. This goes to say that a forward-looking perspective is essentially important.

Another question from the audience proposed to put a package deal on the table combining the commitment to cut the bank-sovereign nexus with tangible progress on EDIS. Jörg Kukies negated the possibility of such a package deal, since certain Member States signalled no willingness at all to engage in the discussion about sovereign risk on bank balance sheets and risk reduction. Nicolas Véron admitted and emphasised that Germany appeared much more willing to engage on EDIS than other Member States are willing to engage on sovereign exposures.

The final question referred to the ESM discussion on precautionary credit lines, which appeared to make it easier for countries to request credit lines, since it is not tied to a programme. In terms of moral hazard, the question is whether Italy will be able to request and use the credit line. Jörg Kukies noted that a convoluted framework for precautionary credit lines that results in a negative signalling effect and impedes access has to be avoided. On the other hand, to address moral hazard issues it requires strict ex-ante conditionality for access and respective monitoring as well as some form of commitment from the receiving Member State that is below the giving up of sovereignty that a full programme would entail. Finding an agreement on the right balance among 19 Member States is not trivial at all. Ex-post conditionality could be neglected, if ex-ante conditionality is strong and enforceable enough during the course of the creditor relationship. Rolf Strauch added that in the light of merely two out of six tools at the disposal of the ESM being effectively used, the motivation behind precautionary credit lines was to differentiate, clarify and enhance the set of tools in order to assist countries under various scenarios.

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