December 15, 2016 / 11:37 PM / 8 months ago

Germany blocks small progress on banking union at EU summit

A European Union flag is held in front of the Big Ben clock tower in Parliament Square, central London, Britain July 2, 2016.Paul Hackett/File Photo

BRUSSELS (Reuters) - Germany prevented a new attempt to break the deadlock on a European Union's plan to boost financial stability in the banking sector by watering down a joint statement of a EU leaders' summit, EU officials said on Thursday.

The so-called banking union plan was launched in 2012 in the wake of the euro zone sovereign debt crisis and the 2007-08 global financial crisis that forced euro zone countries to provide almost 2 trillion euros in capital and guarantees to prop up their banks.

After agreeing on a common supervision plan for euro zone lenders and a joint privately funded scheme to wind down ailing banks, the 19 countries of the single-currency bloc have lost momentum and have been stuck for months in talks on how to set up a European deposit insurance scheme (EDIS) to better protect savers, the third and last pillar of the plan.

They also disagree on whether to set up a financial backstop for the bank fund, with Germany, euro zone's largest economy, opposing moves towards risk sharing before southern European countries with shaky banking sectors have cleaned up their lenders and reduced their systemic risk.

"The European Council underlines the need to complete the Banking Union in terms of reducing and sharing risks in the financial sector, in the appropriate order," read the conclusions of the regular summit of EU leaders.

The appropriate order is understood by the Germans as meaning that, first, banks in countries like Italy or Portugal should become fitter, for instance by getting rid of bad loans. And only later, richer nations of the bloc would agree to put their money in common funds to shield deposits and lenders from future failures.

An initial version of the summit conclusions, circulated among EU diplomats and seen by Reuters, said new risk reduction measures were already approved and paved the way for more risk sharing.

The European executive commission proposed in November new capital rules for the bloc's lenders, introducing in the EU stricter standards agreed at international level meant to make banks safer.

But Germany and the Netherlands said the new measures were not enough to reduce risks and urged stricter requirements. They opposed the initial draft conclusions and successfully pushed for amending the text, two EU officials told Reuters.

Officials said the fragility of the banking sector in Italy, where the country's third largest lender Monte dei Paschi di Siena (BMPS.MI) has been entangled for months in attempts to close a big capital shortfall, has made Berlin even less keen to agree on plans to share risks.

Additional reporting by Andreas Rinke; Editing by Jan Strupczewski

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