The banking union, implemented at the end of 2014 in response to the financial crisis, is still awaiting completion as no agreement has been reached so far on a European Deposit Guarantee Fund. The debate on this issue has polarised the different European countries into two main blocks, which have been called risk sharing and risk reduction. Proponents of risk sharing argue that a European financial system based on a single currency requires a unified deposit guarantee fund for all banks in the eurozone that serves as a common safeguard and avoids national biases. For their part, proponents of risk reduction argue that before talking about risk sharing, risks need to be reduced, especially in those countries that were hardest hit by the crisis.

One of the main concerns in this process of risk reduction focuses on non-performing loans (NPLs), which in the wake of the financial crisis soared to high levels in many financial institutions, and which show significant heterogeneity between countries. Thus, the European Commission and the ECB announced specific measures to reduce non-performing assets, which entail the imposition of a very burdensome provisioning schedule for new NPLs that are generated, as well as an ad hoc supervisory plan to reduce the stock of these assets in the medium term.

Apart from the doubts generated in entities by the coexistence of two parallel proposals for the treatment of NPLs by the EC and the ECB, which do not coincide in their scope or in the timetable for their implementation, and the fact that to a certain extent this approach represents a step backwards in the process of implementing internal models for the calculation of provisions derived from the new accounting standards (IFRS 9), these measures have been accepted by European institutions, and in particular by Spanish institutions, as necessary to standardise the treatment of NPLs across countries. As a result, the process of selling non-performing portfolios that was already underway has been given an additional boost in recent months, leading to a sharp reduction in doubtful assets. In this context, Spanish entities have been outstanding performers at European level. So far in 2018, the amount of ongoing operations to sell non-performing loan portfolios exceeds €27 billion in nominal terms, and in 2017 the figure was even higher, accounting for around 50 per cent of the European total.

The actions undertaken by domestic banks have led to a significant reduction in the doubtful assets ratio of the Spanish financial system, from 5.6% in December 2016 to 4.4% in December 2017 at the consolidated level, according to data from the Bank of Spain's Financial Stability Report. By way of contrast, the average for major European banks stood at 3.9% in the first quarter of 2018, and the European Banking Authority has set 5% as the threshold above which it considers that specific measures need to be taken to reduce risk. These data show that the trend is very positive and will allow convergence with the European mean within a short period of time.

However, despite these regulatory efforts to homogenise risk levels at the European level and those being implemented by the institutions themselves, the reality is that the European Deposit Guarantee Fund project (the main warhorse of the proponents of risk sharing, which includes Spain) remains stalled. This despite the fact that the European Commission, in an attempt to reconcile positions, reduced its scope in its latest proposal, putting aside full mutualisation, and opting for a reinsurance model combined with a possible mandatory lending scheme between the different national funds.

We therefore believe that the time has come to decisively tackle the completion of the banking union project, with the approval of the regulation of the third pillar. It is clear that this process will take years to complete, and it is reasonable to link it to the risk reduction process, so that when the different national funds are finally integrated, the different countries will start in a situation that is as homogeneous as possible. But this is no excuse for delaying the start of the process, which would also send a very positive signal to the markets and would be a decisive step towards building the European financial market.