25 November 2019

ECB's Mersch: From Basel III to European banking regulation

Yves Mersch, Member of the Executive Board of the ECB, argues which should be the ideal levels of capital and liquidity for striking a balance between enabling banks to perform their role in the monetary policy transmission mechanism and, at the same time, avoiding undue risks.

Free markets are the best way of organising an economy – on the whole. And the ECB is constitutionally committed to this principle. But public goods generally require some degree of regulation to protect the interests of society. Financial stability is one of these public goods, embedded in the price stability goal. The ECB contributes to the smooth conduct of policies pursued by the competent authorities to preserve financial stability, and in the pursuit of its microprudential mandate, it has also been assigned some responsibility for macroprudential interventions.

Can the ECB use its regulatory power of monetary policy, which integrates financial stability concerns under its two-pillar strategy, to operationalise and expand its macroprudential powers which are defined in the microprudential mandate? Would that not be considered a self-referral of additional competence and a violation of the separation decision explicitly requested by the legislator when it conferred the microprudential competence on the ECB?

The question is not whether banks need to be regulated. The question is by whom they need to be regulated. There is a need to strike a balance between enabling banks to perform their role in the monetary policy transmission mechanism and, at the same time, avoiding undue risks. What are the ideal levels of capital and liquidity for striking that balance? Is the ECB trying to sidestep the legislator by invoking its monetary policy powers, as its microprudential powers are limited to only implementing the legislator’s will?

Mr Mersch mentioned that some argue that regulatory reforms have gone too far. They claim that the final Basel III package will place too much of a burden on European banks, putting them at a disadvantage to their US peers. They also claim that it will curb profits and make banks less able to support the economy.

Mr Mersch says: “Basel III will change capital requirements, making crises less likely and thus supporting the euro area economy. So we think that the benefits of a faithful, consistent and timely implementation of Basel III will outweigh the costs. And we also think that banks will be able to manage its full impact.”

“A strong regulatory framework is vital if we want to have safe and sound banks; this is an important lesson from the crisis. Basel III provides such a framework. And it is equally important that the regulatory framework is sufficiently harmonised across borders. This is relevant at the global level, but it is even more relevant in the euro area, as a foundation for the banking union.

“This calls for the Basel standards to be implemented faithfully, including in the EU. Fully implementing Basel III will have a positive effect on the economy in the long run. At the same time, we should not breach our promise of no further capital requirements on aggregate. Doing so would undermine our efforts to implement Basel III.”

Monetary policy incorporates financial stability, and microprudential supervision follows its own objective. Macroprudential supervision should continue to contribute to deepening the analysis in line with Article 127(5) of the Treaty. Rushing to operationalise it could be seen as a solution that is desperately looking for a problem.

Full speech on ECB

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