19 November 2019

Financial Times: How a pan-EU insolvency regime could advance banking union

The EU’s long journey towards banking union received a jolt this month when Germany’s finance minister, to general surprise, publicly envisaged a European deposit insurance scheme. Less attention was paid to another of Olaf Scholz’s proposals: his push to harmonise insolvency rules for all European banks, which could change Europe’s economy just as profoundly.

In the document setting out his ideas, the finance ministry cites the US as a “good example”. The US experience in integrating a patchwork of local banking systems does indeed seem relevant for the EU, as Anna Gelpern and Nicolas Véron, researchers at the Peterson Institute, argued in a study for the European Parliament this summer. “

Unlike the EU, the US has two parallel regimes for “chartering” banks — the act of legally setting them up to receive deposits — at state level, but also federal level. In Europe, banks are incorporated in individual member states. The biggest “systemic” ones have recently come under European-level supervision and, in principle, insolvency procedures. That is not true for smaller banks, and it is not clear where the line is drawn.

In 2017, Europe’s Single Resolution Board declined to take control of two failing Italian banks which instead entered national insolvency procedures that allow government aid. That ruffled political feathers in northern EU states, as it seemed to circumvent the EU’s “bail-in” policy under which failing banks’ bondholders should accept losses before taxpayers step in.

But news that Germany could spend €3.6bn to rescue Hannover-based Landesbank NordLB could be seen as double standards, especially by southern eurozone countries. This sort of inconsistency and unpredictability would be reduced if national insolvency rules were harmonised, as Mr Scholz suggested.

Ms Gelpern warns, however, “harmonisation can obscure real differences”. While she is “persuaded of the merits of a single centralised insurance and resolution regime”, she says “the extent to which (insolvency rules) require identical national laws is an open question”.

An alternative to harmonising local rules is to add a layer of common rules on top of them. Albert Bravo-Biosca, an economist at the innovation think-tank Nesta, advocates a “29th regime”, or a parallel set of EU-wide regulations sitting alongside each of the 28 national regimes. That would include pan-European insolvency and bankruptcy rules that companies would have the option to follow instead of their national laws.

Mr Bravo-Biosca’s proposals, which were presented to eurozone finance ministers this month, are not specifically designed for banking but “I would imagine the banking sector would be relatively easier”, he says. Already “some banks are regulated at the European level. It is clear from the euro crisis that if you want banking union to work, changes need to be made.”

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