June 6, 2018 / 4:32 PM / a year ago

Bank of Portugal sees risks from incomplete EU banking union

LISBON (Reuters) - The failure of euro zone nations to agree on a bank deposit insurance scheme was undermining a major benefit of creating a banking union, the deputy head of Portugal’s central bank said.

Bank of Portugal Deputy Governor Elisa Ferreira said that having an incomplete banking union while at the same time imposing other rules across the sector could create a range of risks that could be worse than having no union at all.

“The incomplete set-up of the banking union and the full implementation of the resolution regime are a dangerous combination,” she told a news conference, adding “decisive political will” was needed to complete plans for the union or to revise some of the existing rules.

She said one problem was the potential mismatch in which the European Central Bank was given responsibility for oversight while national governments were left to deal with bank failures.

The European Union drew up plans for a banking union in the wake of the 2007 to 2009 financial crisis, including setting up capital rules to reduce bank risk that would in turn allow more risk sharing among euro zone nations to rescue failing banks.

Under plans so far agreed, the euro zone’s agency for troubled banks, the Single Resolution Board, will be given a clearer mandate to set the level of capital buffers that banks should hold against the risk of failure.

But a common bank deposit insurance scheme, one of the pillars of the banking union idea, has yet to be agreed.

Ferreira said the failure to adopt such a scheme “has seriously jeopardized (the banking union’s) key benefits”.

Regarding bank capital requirements, the European approach to minimum requirements for own funds and eligible liabilities “may challenge the sustainability of the business model of medium-sized institutions predominantly financed by capital and deposits”, she said.

If only larger banks could comply with the complex regulation and tougher requirements that could defeat the purpose of the post-financial crisis push to prevent the creation of banks considered too big to fail, she said.

She added that failing to press on with the union project risked fragmenting the single market and missing the opportunity to create enough financial stability to weather the next crisis.

“If the necessary political will is insufficient ... instead of putting ‘Band-Aids’ in the framework to compensate for the lack of crucial instruments, let’s collectively recognize that it is urgent, and in the best interest of European citizens, that we revisit the existing rules now,” she said.

Reporting by Sergio Goncalves and Andrei Khalip; Editing by Axel Bugge and Edmund Blair

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