30 April 2013

Bank of Ireland/Honohan: Banking Union challenges

In his speech, Honohan focused on the banking pillar, i.e. Banking Union, challenges. "We need Banking Union to transform the financial system from a source of risk and instability to a source of growth and support to the real economy", he said.

We have in fact made considerable progress in recent months – especially under the Irish Presidency – in its construction. However much remains to be done.

Announcement of action to build a Banking Union combined with the firm commitment of the ECB has contributed greatly over the past several months to the gradual but clear restoration of confidence in euro area financial markets. The financial markets are counting on the completion of Banking Union. There is a need to avoid that any easing of tensions in the markets leads to a slackening in the pace of reform.

Banking Union, shifting supervision of banks to the European level, combined with a single resolution regime and a common system for deposit protection will reassure citizens and markets that a common, high level of prudential regulation is being consistently applied. Together with greater fiscal and economic coordination it will help build the necessary trust between member states which is a pre-condition for the introduction of common financial arrangements.

The Irish Presidency has given top priority to the Banking Union files. The Irish Central Bank has been heavily involved in the discussions and negotiations around the large body of legislative reform that is associated with Banking Union.

First the Irish Presidency brokered final agreement on the Capital Requirements Directive and Regulation (CRD IV). This will greatly strengthen the capital and liquidity provisioning of Europe’s banks and improve governance and remuneration practices. It is now expected to apply from January 2014

Agreement has also been reached, following the informal ECOFIN held in Dublin in April, on the Single Supervisory Mechanism for banks in the Euro area. This will transfer bank supervisory tasks to the European level and will provide strong and consistent supervision. Preparations are well advanced within the ECB to take on this task as early as July 2014, depending on the formal implementation date. It has been a remarkable success to obtain agreement on this proposal within 7 months of its publication.

Attention is now focused on negotiations to agree a Bank Recovery and Resolution Directive. This would ensure that authorities throughout Europe would have the means to intervene decisively when problems occur and that the costs of dealing with failing banks fall in a clearly defined order on the owners and creditors. Ministers will discuss this text on May 14th and there is a target to reach agreement by the end of the Irish Presidency.

However the combination of a European supervisor of banks with responsibility for the resolution of bank failures remaining at the national level may not be a stable equilibrium in political economy terms, as individual Member State governments may question and resent the imposition from the SSM of bank resolution requirements potentially including recapitalisation costs. Supervision and resolution should therefore be placed at the same level. The need for this has been acknowledged at successive European Councils which affirmed that it is imperative to break the vicious circle between banks and sovereigns. Now that there is agreement on a Single Supervisory Mechanism it is especially important to press ahead with establishing a Single Resolution Mechanism and Authority and a Single Deposit Guarantee scheme.

Full speech

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