18 September 2018

BIS: Mario Draghi: The benefits of European supervision

Speech by Mr Mario Draghi, President of the European Central Bank, in which he focuses on the benefits of European supervision and improvements of European supervision to foster banking integration.

As much as the global financial crisis has exposed weaknesses in the regulation and supervision of banks around the world, in the EU such weaknesses were exacerbated by fragmentation. From the early stages of the crisis the banking sector fragmented along national lines, driven by diverging macroeconomic conditions in different countries and by governments’ diverging responses in dealing with failing banks.

Differently from the US, common resolution frameworks backstopped by public money were absent. Governments that could do so, because of their sound budgets, massively bailed out their failed banks. An opportunity for bank consolidation was lost, but their economies were spared a credit crisis after a financial crisis.

In other countries where bailouts were not possible due to constrained finances or new regulatory restrictions introduced by the Bank Recovery and Resolution Directive (BRRD), the crisis lasted much longer. European supervision and the European framework for managing bank failures, of which the BRRD is an important part, have made such a cause of fragmentation, namely the different countries’ responses to banking crises less likely today. But more needs to be done.

Progress in completing the Banking Union – namely, first harmonising options and discretions, completing resolution, and laying the groundwork for the creation of an effective deposit insurance – is essential and Mr Draghi is confident that significant steps in this direction will soon be taken.

But let’s keep in mind that fragmentation starts with the decision by banks not to operate in regions where the risk-return of lending is judged to be insufficient to remunerate their invested capital

Ultimately, what ensures a steady flow of bank lending to the economy, even in times of unforeseen stress or disruption, is a growth-friendly environment, which can only be assured by the appropriate government policies.

Full speech

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