02 July 2013

Bundesbank/Dombret: Europe's way forward

"When it comes to supervision – and particularly resolution – of large international banks, it will not be enough to have a European framework. Global financial markets call for global regulations."

Europe is currently very busy forging a banking union. A single market for banking is the logical complement to the single currency. And a highly integrated banking system is positive news for the real economy. The planning for a joint banking supervision, for the so-called single supervisory mechanism (SSM) is taking shape. It will be established under the roof of the European Central Bank and will operate in close cooperation with the national central banks of the euro area, including the Bundesbank.

Planning for the second critical institution in a banking union, the common resolution framework, is less advanced. Ideally, the single resolution mechanism would be in place at the same time as the SSM (second half of next year). However, it looks as if this is unlikely to happen. For a start we will probably have a network of national arrangements with national resolution authorities and national resolution funds endowed by the banking industry.

But as we all know: banking is global. When it comes to supervision – and particularly resolution – of large international banks, it will not be enough to have a European framework. Global financial markets call for global regulations.  

Even a European banking union based on sound institutions will not be able to meet expectations if it is not underpinned by prudent macro-economic policies. Many European countries are currently making progress in cutting public expenditures, strengthening competitiveness, and improving their current account. They very much have to hold their course, since there is no alternative to those efforts. Structural reforms are essential to bring back growth.

Some expect central banks to be the ones that can bring back growth. And indeed, over the past few years, many central banks have taken on more and more tasks. Central banks can do, and are doing, a lot to prevent tail events and are buying time for politicians to undertake the reforms needed to tackle the root of the crisis. But I am concerned to see central banks being pushed into the role of an all-purpose weapon of sorts. This will not do anybody any favours. But we should not let politicians lean back, we need to bring the other relevant players back and remind them of their responsibilities.

Full speech

© Deutsche Bundesbank