Banking union: achievements and challenges

Banking union: achievements and challenges

Speech by Luis de Guindos, Vice-President of the ECB, on the Excessive-level convention on “Strengthening the EU’s financial institution disaster administration and deposit insurance coverage framework: for a extra resilient and environment friendly banking union” organised by the European Fee

18 March 2021

Establishing the banking union was a vital step in guaranteeing the steadiness of the euro space monetary system and strengthening Financial and Financial Union (EMU). The worldwide monetary disaster and sovereign debt disaster highlighted the necessity to make quicker progress in direction of finishing EMU. Greater than a decade on, now is an effective time to take inventory of the place we stand within the banking union: what we have now achieved and what works, but in addition what stays to be completed.

With ECB Banking Supervision on the coronary heart of the Single Supervisory Mechanism, we have now an authority chargeable for guaranteeing the security and soundness of the European banking system, selling monetary integration, and guaranteeing constant supervision by fostering harmonised practices based mostly on excessive supervisory requirements.

The Single Decision Mechanism continues to be strengthened, each by means of the build-up of the Single Decision Fund, which can attain its goal by the top of 2023[1], and thru the latest settlement on a backstop supplied by the European Stability Mechanism.

The implementation of those two pillars represents a milestone in European integration and a significant success for monetary stability. However when it comes to finishing the banking union we aren’t there but. Immediately, I’ll deal with three areas for enchancment. First, the ultimate pillar: the European Deposit Insurance coverage Scheme (EDIS). Second, within the area of disaster administration, the instruments for coping with the failure of smaller and deposit-funded banks. And third, the position of macroprudential coverage and the way it can assist us cope with shocks to the monetary system.

Virtually six years on from the European Fee’s first proposal on EDIS, deposit insurance coverage continues to be on the nationwide degree and there was little ambition to alter it. That is problematic as the extent of confidence within the security of financial institution deposits might differ throughout Member States. As long as deposit insurance coverage stays on the nationwide degree, the hyperlink between a financial institution and its dwelling sovereign persists.

The ECB has been a staunch supporter of EDIS from the start and helps pursuing a totally fledged EDIS as a key precedence. However we have now not but seen ample political will to implement this third pillar of the banking union. Member States are presently discussing a mannequin for the transition interval, a “hybrid mannequin” that provides liquidity help to nationwide schemes as a primary step.

For my part, this hybrid mannequin may very well be a doable compromise means ahead, so long as an EDIS with full risk-sharing, masking each liquidity wants and losses within the regular state, stays the top objective.

Turning to my second level, in our quest to handle some banks being “too large to fail” we have now created a devoted structure for the disaster administration of bigger and cross-border banks. However much less consideration has been dedicated to the instruments for managing crises in small and medium-sized banks. The belief was that the failure of such banks wouldn’t increase monetary stability issues and may very well be handled underneath nationwide liquidation procedures.

Sadly, expertise has proven that this assumption is just not fully correct. Smaller and medium-sized banks, specifically deposit-funded banks, have much less devoted loss absorption capability. The failure of such banks can result in losses for depositors, which is difficult for depositor confidence and monetary stability.

The numerous variations in nationwide authorized regimes for the liquidation of banks make the problem much more difficult. In a single Member State, depositors might discover on a Monday morning that their deposits had been transferred to an buying financial institution over the weekend they usually can proceed to entry their deposits as if nothing had occurred. In one other Member State, such a greatest observe switch software will not be out there. Lined depositors should await a pay-out by their nationwide deposit assure scheme. And uncovered depositors might need to bear losses.

These variations create an uneven taking part in area for financial institution prospects and might forestall failing banks from exiting the market easily. An answer can be to create a typical European liquidation software, following one of the best observe instance of the Federal Deposit Insurance coverage Company (FDIC) in the US.

Addressing disaster conditions is just not solely about failing banks and deposit insurance coverage. It’s also in regards to the monetary system’s capability to soak up shocks and keep away from extreme deleveraging when losses materialise which exacerbate the adverse shocks to the true financial system. This brings me to my third and last level: the necessity for a more practical and centralised macroprudential coverage within the euro space. Let me clarify.

Macroprudential coverage and financial coverage strongly complement one another. As an example, throughout phases of threat build-up, efficient macroprudential coverage can take away the burden from financial coverage with respect to monetary stability issues. Equally, in occasions of disaster when dangers materialise, capital buffers that may be launched by authorities can help financial coverage through their influence on the availability of credit score from banks.

Whereas the system had ample structural buffers firstly of the coronavirus (COVID-19) disaster, buffers that may very well be launched – just like the countercyclical capital buffer – accounted for under 0.2% of risk-weighted property on the finish of 2019. This imbalance between structural and releasable buffers has gained extra consideration within the macroprudential debate for the reason that starting of the pandemic. There’s rising consensus on the necessity to reassess the present steadiness between structural and releasable buffers and to create what I’d name macroprudential area that may very well be utilized in a system-wide disaster.

I want to recommend three guiding ideas. First, the creation of macroprudential area needs to be capital-neutral. In different phrases, we must always amend or rebalance sure current buffer necessities moderately than creating extra buffer necessities. Second, we want robust governance to make sure that capital buffers are launched (and subsequently replenished) in a constant and predictable means throughout international locations within the face of extreme, system-wide financial stress. Centralising macroprudential motion on the euro area-level, based mostly on a transparent goal framework, might foster a well timed coverage response and cut back fragmentation throughout nationwide borders. And third, the creation of macroprudential area shouldn’t modify nationwide authorities’ current macroprudential tasks and competences as allotted inside the present regulatory framework.

Let me conclude. We now have come a good distance on the trail to finishing the banking union. However we aren’t there but. What stays to be completed is formidable. However it’s formidable and achievable. When the pandemic disaster struck this time final yr, the joint European response revealed the energy of a united Europe that may react and transfer forwards swiftly. Allow us to seize this second and this chance to enhance.

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