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Economy 08 Apr 2019

BBVA calls for the prompt completion of the Banking Union

Current progress in finalizing the Banking Union has been insufficient. There are still a number of elements to be settled, fundamentally resolution, insolvency, and the deposit guarantee scheme. “It will not be easy to reach an agreement on the most important aspects prior to the European elections for parliament, but it is critical to do so as soon as possible to avoid jeopardizing member countries’ commitment to the Banking Union,” maintains José Manuel González-Páramo, BBVA executive board member.

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The executive board member and BBVA's Head of Global Economic & Public Affairs has published an article in the magazine of the financial forum Eurofi. In the article, he outlines various steps that Europe should take to complete one of its fundamental projects, the Banking Union. He discussed this topic at the round tables of this forum celebrated in Bucarest.

The Banking Union will not be fulfilled until the European Deposit Insurance Scheme (EDIS) and a common backstop to the Single Resolution Fund have been defined and adopted. Progress is required in two other areas: a common insolvency regime for banks and a resolution financing mechanism (given that the Single Resolution Fund and its future backstop are not sufficient).

In his article, González- Páramo maintains that, after years of effort focused on reducing risk in Europe, “it is time to clear the current legislative logjam and make progress in pooling common resources to counter these risks.”

Establishing EDIS is the logical next step after raising banking supervision and resolution to the European level. According to the article, guaranteeing the deposits on a European level increases the confidence in these deposits. This, in turn, translates into greater stability and less risk to the deposit scheme. Furthermore, potential contagion effects between countries is thus limited, thereby fostering financial stability and promoting competition between European banks and the cross-border flow of capital. Finally, EDIS will facilitate breaking the link between a country’s sovereign risk and its local banks; concurrently, it would reduce financial fragmentation within the Banking Union itself.

European legislators should also now focus on creating a common insolvency regime for the banks in the eurozone, according to González-Páramo’s article. In his opinion, the national authorities have so far demonstrated divergent approaches to managing failed banks, which brings to light the need for a common regime with common criteria. The author sustains that the authorities overseeing insolvencies should have similar powers to those of the resolution authorities.

The article concludes that together with the creation of a resolution finance mechanism and the EDIS, a common insolvency regime for European banks will be a decisive step to finalizing the Banking Union.