29 August 2013

ECB/Mersch: The Single Market and Banking Union

Mersch highlighted three specific channels where he thought Banking Union could be strongly positive for the Single Market: By encouraging greater cross-border banking integration; by increasing confidence in banks' balance sheets; and by helping to break the bank-sovereign nexus.

Channel 1: Encouraging cross-border banking integration

Starting with the first channel, Banking Union is expected to play an important role in boosting financial market reintegration in Europe and the creation of a truly European banking sector. Ideally if the Spanish SME cannot borrow at reasonable rates from a Spanish bank, it would be able to borrow from an Austrian bank instead. This is what a Single Market in capital means. Banking Union can facilitate this by creating the same standards for banks across Europe.

Channel 2: Increasing confidence in banks’ balance sheets

Investor confidence has been damaged by the perception that some supervisors have not been tough enough with their domestic banks. The average price-to-book ratio of large and complex banking groups in the euro area, for instance, is currently only 0.5, which implies that investors think banks are overvaluing their assets, will not meet their required rates of return, or will require new capital. And trust tends to be lower in some jurisdictions than others, creating fragmentation, as shown by certain banks’ lack of access to market funding.

Channel 3: Breaking the bank-sovereign nexus

Banking Union can support the Single Market in capital, and that is by – at least partially – breaking the bank-sovereign nexus. This nexus has a number of aspects, but the most relevant for the Single Market is the connection between the fiscal strength of the sovereign and the funding costs of banks. In general, banks with stronger sovereigns can fund more cheaply as they benefit from an implicit sovereign guarantee. This leads to lower borrowing costs for firms located in that territory.

Conclusion

A successful policy regime is based on an effective accord of rules, institutions and instruments. This exists for the Single Market in goods and services, where the rules are laid down by EU legislation, the Commission oversees them, and it has various instruments, like infringement proceedings, to enforce its decisions.

And there is need now to build a similarly effective regime for the Single Market in capital. Already some new rules are in place, for instance on capital requirements. “We are on the verge of agreeing to a new mechanism for supervision. But now we need to make sure that we have a strong authority for resolution, and that it has proper instruments to do its job, like the bail-in tool from 2015.”

Willy Brandt once said that “what we want is a Europe of daily reason and of common sense, and we must be prepared to state this and, where necessary, to act”. "It is my conviction that Banking Union is one of the clearest examples of where elevating powers to the European level is common sense: it brings benefits for citizens, who have a safer banking sector; for banks, who have a more consistent environment; and for governments, who are less liable for bailing-out", Mersch concluded.

Full speech

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