ECB reassures EU leaders on bank stability, calls for EU deposit insurance

By Jan Strupczewski

BRUSSELS (Reuters) – The European Central Bank reassured European Union leaders on Friday that euro zone banks were safe but called on them to push on with an EU deposit insurance scheme, officials said.

On the second day of talks in Brussels, EU leaders discussed economic issues, including changes to the bloc’s fiscal and debt rules, but concern over the impact of the troubles of Credit Suisse and Silicon Valley Bank (SVB) on the EU banking system was high on the agenda, officials said.

European banking stocks fell sharply again on Friday, with Deutsche Bank and UBS knocked by worries that actions by regulators and central banks have yet to contain the worst problems to face the sector since the 2008 financial crisis.

Deutsche Bank shares fell for a third day, dropping more than 12% after a sharp jump in the cost of insuring its bonds against the risk of default.

“The euro area banking sector is resilient because it has strong capital and liquidity positions,” ECB head Christine Lagarde told EU leaders, according to officials at the meeting.

“The euro area banking sector is strong because we have applied the regulatory reforms agreed internationally after the Global Financial Crisis to all of them,” she said, adding that the ECB’s “toolkit” was fully equipped to provide liquidity to the system if needed.

Defending the ECB’s push to raise interest rates to stamp out high inflation at a time of turbulence in the financial sector, Lagarde said there was no trade off between fighting inflation and keeping the banking sector stable.

“Our toolbox enables us to address risks to both,” she told the leaders, according to EU officials. “We are determined to bring back inflation to 2%. We will decide on future rates based on incoming data,” she was reported as saying.

She called on the leaders to push on with their banking union project, started in 2012, which still lacks a European Deposit Insurance Scheme (EDIS) that would strengthen or replace the existing patchwork of national schemes.

She also called for a Capital Markets Union in Europe to give companies, now relying mainly on bank loans, better access to funds at a time when they have to compete with China and the United States in “green” technologies to fight climate change.

“Now, we need to progress on completing the banking union,” Lagarde was reported as telling the leaders. “Further work is also necessary to create truly European capital markets.”

“Completing the Banking Union” is EU code for introducing EDIS as the last missing element from the project that already created a pan-euro zone bank supervisor and a single resolution authority with a special fund to resolve failing lenders.

While most EU countries have some form of national insurance that guarantees deposits up to 100,000 euros ($108,300), there is no EU-wide scheme, nor a way for authorities to work across borders if a crisis is too much for one country alone.

The main opponent of EDIS is Germany, concerned that if deposit guarantees are mutualised at EU level, Berlin could end up paying deposits of failing banks in other countries, like Italy, still burdened with poor credit or investment decisions from years ago.

($1 = 0.9232 euros)

(Reporting by Jan Strupczewski; Editing by Richard Chang, Kirsten Donovan)