27 February 2013

ECB/Mersch: The European banking union – First steps on a long march

Mersch said that the planned European Single Supervisory Mechanism, in combination with a Single Resolution Mechanism, would make a key contribution towards restoring financial stability in the euro area.

The primary mandate of the ECB is, and will remain, to maintain price stability in the euro area. This objective will not change with the ECB’s new responsibility for banking supervision in Europe. However, bearing in mind the role of financial markets for the transmission of monetary policy and the importance of well-integrated financial markets in a monetary union, measures to ensure a stable and well-ordered financial system in the euro area will be beneficial for the conduct and smooth transmission of monetary policy. The banking union can therefore support our single currency and can relieve monetary policy of some of the tasks undertaken during this crisis – notably, the task to repair or, in some cases, to bypass a clogged transmission channel. The non-standard measures may then be gradually phased out, as the changes introduced in the monetary policy framework during the crisis will no longer be necessary. This should not be confused with a change in course from the accommodative monetary policy.  A phasing-out of certain emergency measures is desirable, given that new market distortions might otherwise emerge

The establishment of the SSM represents a great opportunity for financial integration in Europe. First, the swift adoption of the SSM Regulation is essential. Definite plans are crucial in order to uphold the current momentum of the stabilisation of the euro. The general expectation is that the SSM will be established early this year, with an effective operational start 12 months later. Second, the design of a supervisory model, including the allocation of tasks between centre and periphery is critical for the success of the SSM. In this regard, work is already underway by the ECB in cooperation with national competent authorities – subject to the final legal wording.

Third, the SSM will need to carry out a comprehensive review of the banks that fall under the direct supervision of the ECB. As set forth by the Regulation, this exercise should include elements of an asset quality review as a basis for a thorough solvency analysis. This analysis should also be instrumental in identifying potential legacy problems. It is important that the financial clean-up of these legacy problems will be undertaken by the responsible Member States and not by the ESM and certainly not by the ECB. Just like an insurance policy, the SSM can cover future risks. Past omissions must be resolved by those who are accountable for them. This does not rule out interim solutions involving actions by the SRM and (privately financed) resolution fund as well as by the ESM.

Fourth, appropriate safeguards to mitigate reputational risks – for both the supervisor and the monetary policy maker – are needed. It is therefore critical to implement an actual internal separation between supervisory and monetary functions, that should also be coupled with an external dimension, reinforcing the outside perception of such clear operational and accountability separation. The Chair of the Supervisory Board is responsible for discharging the accountability duties towards the European authorities (European Parliament, finance ministers of participating Member States, the European Commission). They may also, on occasion, be asked to report to national parliaments. More regularly, the representatives of the national competent authorities will perform such a role at the domestic level.

Let me now turn to the establishment of a Single Resolution Mechanism (SRM), which constitutes the second pillar of the banking union and is a necessary complement to the SSM. It is crucial that the SRM is in place once the SSM is operational. There would otherwise be a danger of creating potential conflicts between supervisory and central bank perspectives. It would be a misunderstanding to believe that there will be no more troubles at banks as soon as responsibility for banking supervision is conferred to the ECB. On the contrary, non-viable banks will have to be closed down and resolved in order to prevent the “zombification” of the European banking sector. The viable parts of certain banks may nevertheless require transitional funding – which should not be mistaken for a bail-out.

A single resolution mechanism is hence an essential condition. It will ensure timely and impartial decision-making focused on the European dimension and that resolution costs are borne by the private sector, thus putting an end to the expectation that taxpayers will foot the bill. The era in which the privatisation of profits and socialisation of losses was possible should belong to the past.

The SRM should be equipped with a comprehensive set of enforceable tools and powers to resolve all banks participating in the SSM. This mechanism should under no circumstances be placed with the ECB, in order to nip any potential conflicts of objectives in the bud. However, the flow of information to the SSM must be safeguarded.

This calls for urgent adoption of the Bank Recovery and Resolution Directive that will provide a harmonised toolkit across the EU.  The SRM should have control of and access to a European resolution fund for resolution financing. This fund should be funded by ex-ante risk-based levies on the industry. The European resolution fund should have access to a temporary emergency facility that is fiscally neutral in the medium term, meaning that any temporary public support will be recouped by ex post levies on the industry.

Full speech

© ECB - European Central Bank