UPDATE 1-Germany's Scholz signals open to move on post-crisis bank reform

Germany is willing to support a pan-European bank deposit protection scheme as long as individual countries remain chiefly responsible for shielding savers of a troubled bank, its finance minister said on Wednesday.

Germany and other northern European allies have long been reluctant to back a joint scheme to insure eurozone deposits before banks in countries such as Italy, Greece or Portugal cut bad loans - a legacy of the sovereign debt crisis. In an op-ed for the Financial Times, German Finance Minister Olaf Scholz said Berlin was willing to compromise and end the deadlock, arguing that Europe has to move forward if it does not want to lose standing internationally.

"We understand that compromises are necessary to complete (the) banking union," Scholz said, referring to a package of wider reforms devised after the financial crash that includes deposit protection. Scholz said that European financial markets are still fragmented, pointing to barriers to the free flow of capital.

Scholz, the finance minister and Vice-Chancellor in Chancellor Angela Merkel's ruling coalition, suggested a four-step approach to complete the banking union reforms. First, the EU must have common insolvency and procedure to wind up troubled banks, Scholz said, pointing to the example of the U.S. Federal Deposit Insurance Corporation.

Scholz said that bank risks must be cut further. "This means further reducing the number of non-performing loans and tackling the risks associated with sovereign debt," he wrote. "Sovereign bonds are not a risk-free investment," he added. Banks should, therefore, have to make provision for risks arising from sovereign debt within an "appropriate" transition period, the minister said.

"Third — and this is no small step for a German finance minister — an enhanced banking union framework should include some form of common European deposit insurance mechanism," Scholz said. "However, such a scheme would be subject to certain conditions, one of which is that national responsibility must continue to be a central element," Scholz said.

In the case of a bank failure, a three-step mechanism would apply. First, the money of the national deposit guarantee scheme would be used. If those national resources are exhausted, a new European deposit insurance fund could provide limited additional liquidity through loans, Scholz said.

If additional financing was still be needed, the home country of the failed bank would have to step in. "A limited loss coverage component for the European deposit insurance fund could be considered, once all the elements of the banking union have been fully implemented," Scholz said.

The fourth and final building block of reform is the creation of uniform taxation of banks in the EU, Scholz said.