ECB calls for deposit guarantee scheme to build banking union

 
Tim Wallace
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A BANKING union across the Eurozone is vital to ending the crisis and creating a stable base for future growth, the European Central Bank (ECB) said yesterday, although the German Bundesbank appeared cynical towards plans to integrate financial sector risk.

A union could only work if properly anchored in a fiscal union with powers to stop countries breaking budgetary rules, Bundesbank vice president Sabine Lautenschlaeger said.

Nonetheless the ECB proposed several steps to establish a banking union, that it claims must be taken to stabilise the region’s economies.

An international deposit guarantee scheme would be a key step, the ECB said, to help reassure depositors who have removed cash from banks in countries such as Greece. The report also called for the link to be broken between banks and sovereigns “which significantly exacerbates the impact of financial disturbance.”

Supervision of the financial sector across Europe should be centralised to “reinforce financial integration, mitigate macroeconomic imbalances and, therefore, improve the smooth conduct of the single monetary policy,” while the risk to taxpayers should be “minimised through adequate contributions by the financial industry,” the ECB said.

However, the report recognised “these reforms will certainly take time to implement and may require substantive legal changes.”