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Central banks 22 Apr 2016

EDIS and sovereign treatment: Decoupling two separate issues

The European Deposit Insurance Scheme is one of the essential steps towards the completion of the banking union. At the same time, banking authorities are reviewing the treatment granted to banks’ sovereign risk exposure. However, both lines of work should be independent. BBVA executive board director José Manuel González-Páramo took the opportunity offered by his participation in the Eurofi financial forum – which is taking place this week in Amsterdam – to defend this idea.

In an article published within the framework of the Eurofi forum, José Manuel González-Páramo argued that the purpose of the European Deposit Insurance Scheme (EDIS) should be to complement previous efforts on the implementation of Europe’s single supervision and resolution mechanisms. However, he believes that it is essential to not link this issue to the treatment of banks’ sovereign exposures, because the implementation of this risk reduction measure (which is currently being reviewed) is extremely complex and should be analyzed with a long-term view.

In his opinion, the European Deposit Insurance Scheme is the third and long-awaited pillar that completes the banking union. In his own words, this mechanism “ill enhance the banking system’s resilience to future crises, reinforcing financial stability, and restoring a level playing field by limiting competitive disadvantages related to banks’ country of settlement.”

On the other hand, BBVA’s executive director emphasized that an eventual change in how sovereign risks are treated is a long-term initiative that should be carefully analyzed, given its complexity. Up until now, sovereign debt is considered risk-free asset. Any change in it, would mean a paradigm shift with far-reaching consequences to the present framework, (i.e., practical problems of not having risk-free assets, scarcity of high-quality collateral, pro-cyclical effects, etc).

When Europe has attempted to move ahead of global discussions the results have not been good

In the article, he reminds that the Basel Committee is currently working on the prudential treatment of sovereign exposure. A document with potential policy options is expected by mid-2016. Any decision at the European level should follow the recommendation by the Basel Committee.

According to BBVA’s executive director, the EU agenda should not rush to conclusions ahead of international developments on this issue, because, otherwise, if these measures are not globally implemented, there will be an unleveled playing field between European banks and the rest of the world. “When Europe has attempted to move ahead of global discussions the results have not been good,” he concludes.

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