a real and well - known risk of fiscally overburdened states possibly infecting their own banking system and triggering a solvency crisis at banks. and this sovereign - bank nexus, in turn, affects the ex - ante likelihood of a european deposit insurance scheme becoming involved. in order to improve the current situation, a crucial element has to do with current incentives contained in banking regulation. at present, sovereign bonds from member states of the euro 3 / 5 bis central bankers'speeches area have a zero risk weight under the capital requirements regime. essentially, this means that the economic risk attached to sovereign debt ( which is larger than zero ) is not reflected in capital requirements. nor is there any upper limit for exposures to specific sovereigns. this preferential treatment is a factor that actually contributes to the sovereign - bank nexus and therefore needs to be altered. please bear in mind that given the risks that are currently not resolved in several areas, a third pillar is not only unjustified because of the heterogeneous levels of risk at national banks. it would also reduce incentives to address those national issues if a mutualised insurance scheme were in place. so as you can see, the reasons for postponing edis are founded not on an ideology - based rejection, but very much on stability considerations. 4 the road to stability : are we locked in a stalemate? this brings me to a second mindset i frequently encounter when discussing the future of the banking union. it concerns the idea of a trade - off between crisis mitigation and crisis prevention measures. essentially, some interpret the ongoing risks for the euro area as a sign that we are approaching a stalemate situation, where self - recovery potentials in the financial system will be exhausted – as will options for action. in this situation, the reasoning goes, would it not be better to compromise on short - term oriented “ flexible ” measures – however counterproductive in the medium and long term? and would this not be an argument for an immediate completion of the banking union? the great value of systemic analyses is beyond doubt. but at the same time, i wonder whether a simple trade - off between short - term and long - term goals might not be the result of over - hasty generalisations. let me set these thoughts in the context of our main topic of european deposit insurance. my guess is that here, too, hasty calls for new policy agendas are partly the result of a too - narrow

andreas dombret : now or later? completing the european banking union lecture by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the graduate institute geneva, organised by the international centre for monetary and banking studies ( icmb ), geneva, 20 february 2018. * * * 1 intro dear charles wyplosz, ladies and gentlemen thank you very much for inviting me back to geneva. when one has the chance to address an audience such as the one here at the graduate institute, one usually has a hard time deciding on the topic, because the academic curiosity gathered in this room will allow you to embark on almost any intellectual journey. but knowing that charles has a special interest for the grand scheme of things in the euro area, and given my affiliation to european banking supervision, it was easy to pick the european banking union as a subject and the ongoing question : should we complete it now or later? 2 the banking union and ongoing stability risks when we are talking about the future of the banking union, we should not do so without looking at its past. so let us briefly jump back to the early summer of 2012. at that time, plans for the european banking union were still vague, but it quickly began to take shape, partly due to still very vivid memories. in the run - up to the crisis, banks in the euro area had lost confidence in each other and refrained from lending. depositors in countries that were hit by the crisis lost confidence in their domestic banking systems and withdrew deposits in significant volume. national supervisory authorities were themselves contributing to the crisis by ring - fencing their national banks in an attempt to block contagion. this, in turn, dried up the credit channels in the very countries that would have needed economic stabilisation the most. one of the bold steps taken in europe to prevent a repetition of such events was to create the banking union. and it was through great determination that the first pillar was put in place. just two years after the idea started to gain traction, in november 2014, the common supervision over banks of the euro area – the single supervisory mechanism – went fully operational. by then, supervisory staff totalling about 1, 000 employees1 had already been deployed at the ecb ; the balance sheets of all large euro area banks which would be under direct ecb supervision were subjected to a thorough assessment – and where capital gaps were discovered, strict plans on how to fill them had to be submitted. let