Risk Annual Summit: Depositors will trust EU guarantee despite Cyprus, says BdF official

Despite the Cyprus bailout plans, EU policymakers will push ahead with a new deposit guarantee – part of plans for a single supervisory mechanism (SSM), or banking union – attendees at the Risk Annual Summit have heard.

“We clearly hope that the two other parts [of the SSM] – resolution and the deposit guarantee scheme – will come very quickly, because as the Cyprus situation has shown, it’s really part of the same system,” said Sylvie Matherat, deputy director-general of operations at the Banque de France.

Asked whether savers would have faith in an EU-wide deposit scheme having seen EU authorities accept a depositor-funded rescue in Cyprus, Matherat was unequivocal. “Yes, of course. And I would say that it would even create a greater incentive to go quicker on that issue. Basically, we want to give – and we wanted to give – a guarantee for depositors under €100,000, and that gives us a strong incentive to go quicker on this project,” she said.

She added that belief in the new system would be underpinned by the force of law. “When the directive is put in place, this will become the law. You can’t go against the law,” she said.

In order to finance a €5.8bn domestic contribution to a €17bn EU bailout of the country’s banks, Cyprus last week proposed a one-off levy of 6.75% on savers with deposits of less than €100,000, and a levy of 9.9% on those with deposits greater than €100,000. Under the original terms of the proposal, depositors would receive shares in the bailed-out banks as compensation.

The EU’s proposed deposit scheme would seek to cement a deposit guarantee in law across all members of the banking union, with the hope of shoring up the confidence of depositors in indebted southern European banks. The conference heard on Wednesday that the SSM could take effect by mid-2014.

Fabian Zuleeg, chief economist at independent think tank the European Policy Centre, argued that a collective deposit scheme – as part of the SSM – was important to ensuring wider EU financial stability.

“If we had the banking union fully operational, we would not have the problems we have in Cyprus at the moment. We could have just let those banks go bust, and let the depositors under €100,000 be covered by an insurance scheme. That would have been a much better solution,” he said.

Zuleeg argued the euro’s integrity was protected by a broader political commitment – a symbol of which was the pledge offered in July 2012 by European Central Bank (ECB) president Mario Draghi, to do “whatever it takes” to keep the euro intact.

That view was met with scepticism, however, by another panellist, Chris Cruden, chief executive of Swiss hedge fund manager Insch Capital Management. Cruden suggested that making such a public commitment in effect told the market the ECB was prepared to let the euro’s value fall significantly during the course of extraordinary monetary easing measures designed to keep the currency bloc intact.

“From a trading point of view, whenever anyone says ‘whatever it takes’, I immediately think, ‘what’s your number?'” Cruden said.

The Banque de France’s Matherat responded quickly: “There is no number,” she said.

 

This article was first published on Risk

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