22 July 2013

Bundesbank: European SSM for banks – First step on the road to a Banking Union

Although the Banking Union cannot solve the current crisis, it can play a valuable role in making crises less likely in the future. Ongoing work on the Banking Union should also involve examining the legal basis of the SSM and investigating potential improvements.

The European Council and European Parliament have reached a consensus on a regulation establishing a European Single Supervisory Mechanism (SSM), conferring supervisory powers on the European Central Bank (ECB). EU Member States whose currency is not the euro are entitled to opt into the SSM.

But the SSM is only one component of the Banking Union; another key pillar will be a Single Resolution Mechanism (SRM) with uniform rules for the resolution of banks. Although the Banking Union cannot solve the current crisis, it can play a valuable role in making crises less likely in the future. To achieve this, it is important to ensure effective governance structures, a clear-cut separation between monetary policy and prudential tasks and a sound legal basis for the new framework.

At present, the key monetary developments in the euro area are moderate growth in the M3 money measure and a fall in the volume of loans to the domestic private sector. However, the aggregated euro area figures mask very different developments 

The diverse developments in euro area countries (especially Germany vs periphery) pose a challenge for euro area monetary analysis. Evaluating monetary dynamics purely on the basis of aggregated euro area developments would be simplistic - an essential first step is to identify the causes of the countervailing developments in monetary and lending growth at national level. Euro area monetary policy can only respond to these kinds of country-specific risks if they pose a threat to price stability throughout the euro area. Otherwise, action must be taken in other policy areas. A whole range of measures will be needed to combat this problem, such as the disclosure of existing or expected losses, a decision on the resolution, restructuring or recapitalisation of troubled banks and legislation designed to prevent new vulnerabilities from arising in the future.

Yield curves capture the relationship between bond maturities and bond yields. They provide a whole range of information, such as insights into market participants’ growth and inflation expectations, and are therefore also relevant to monetary policy. Since the onset of the financial, banking and sovereign debt crisis, however, it has become more difficult to interpret yield curves, as factors such as liquidity risk or default risk are now having an increasing impact on yields.

Against this backdrop, the July monthly report comments on the results of methods that can be used to isolate a wide array of yield curve determinants such as growth and inflation expectations and term premiums which change over time, as well as influences stemming from the market structure, such as liquidity haircuts. Findings show that it is not always possible to identify clearly the changes in inflation expectations or changes driven by liquidity or credit ratings. However, the analytical tools it presents help to shed some light on developments in yield curves and their determinants. Yield curve models are therefore also a valuable point of departure for gaining a better understanding of monetary policy transmission.

Full summary

Full report (in German)

---

Separately, the German newspaper FAZ reports that the Bundesbank has raised concerns over the quality of the assets which the ECB and other eurozone central banks accept as collateral. Having accepted only assets of the highest standard in the beginning, the ECB has now lowered the rating requirement for the controversial loan obligations, so-called "asset-backed securities" (ABS) from the top AAA rating to a mere A. "Assets" in those papers could be mortgage loans for homes, but also auto or consumer loans.

"Looking at the balance sheet of the Eurosystem, not only are the dimensions gigantic but the quality is frightening", criticised the former ECB chief economist Jürgen Stark last year. The ECB also has decided to waive minimum rating for bonds not only for Greece but also for Ireland, Portugal and Cyprus.

Full article (in German) © Frankfurter Allgemeine Zeitung GmbH

© Deutsche Bundesbank