04 September 2013

ECB/Asmussen: Towards a banking union – The state of play from the ECB's perspective

Translated from the German

We are about to make one of the most important decisions in the history of the European Monetary Union. I expect that the European Parliament will adopt a bill next week for common banking supervision. This puts the effective start of banking supervision at European level in the autumn of 2014 within reach.

However, it would be a fallacy to believe that the banking sector in Europe will recover simply by putting banking supervision under the ECB's control. The common banking supervision is a necessary but not sufficient step towards recovery of the banking sector. The need for reform and action in other policy areas has not effectively decreased. A European Banking Union with all its elements is a prerequisite for a genuine, integrated European financial market. This would benefit:

1. The banks, because they will operate under a unified regulatory and supervisory framework;
2. The borrower, because they will be judged according to their creditworthiness and not on their location;
3. The taxpayer, because they will no longer be the first to pay for possible future bank imbalances.

Common Banking Supervision - where are we?

If the European Parliament approves the bill for a common banking supervision next week, we will have created a level playing field for all banks in the euro area. Especially for cross- border banks it will then be easier as they have to adhere to only one set of rules. But there are yet some very practical tasks to be solved: Once the legislative process is completed, we will begin to recruit experts and managers for the common banking supervision. I assume that the supervisory team will count about 1,000 employees. Our internal preparations focus on four priorities:

1. The compilation of a data set with information on all banks in the euro area. Based on this comprehensive overview of the banking system, we will then decide which banks will be supervised directly by the ECB. We currently expect that approximately 130 banks and banking groups will fall into this category. The assets of these banks account for about 85 per cent of the assets of the euro area.
2. Reporting to the common supervision: In order to standardise the data collection we have compiled a comprehensive guide. This is currently being tested in a pilot study.
3. A unified supervisory model. This regulatory model clarifies how the different levels - national and European - will work together. The goal is to create a team for each bank that falls under our direct supervision that consists of both national and European supervisors in order to benefit optimally from the know-how on both sides. However, we will issue a public consultation in the autumn before finalising these detailes.
4. Fourth, a comprehensive evaluation of those banks which will be put under the direct supervision of the ECB. This so-called Comprehensive Assessment that encompasses a risk assessment, an asset quality review and a stress test, is currently getting the most attention.

We should also consider now how we intend to handle vulnerabilities that are discovered in the course of the Comprehensive Assessment. Any capital gaps should be covered primarily through the market, but we will also need a plan B in the event that individual banks cannot raise the necessary capital. Only then will the assessment and stress tests become believable.

The rule should be that every state needs to clean up his own legacy. Only when these two options - private sector and national budgets - have been exhausted, the existing European Stability Mechanism (ESM) can step in as last summer in Spain. I would like to take this opportunity to make it clear, however, that this final option is not to be confused with direct bank recapitalisation via the ESM.

It seems particularly important to me that two things are pointed out in the context of having the commen banking supervision under the roof of the ECB:

• Monetary policy and banking supervision do not have to lead to a conflict of interest. In fact, central banks have a strong interest in financial markets, not least so that their monetary policy can work properly. Therefore, it may indeed be useful to incorporate banking supervision into the scope of a central bank, alongside monetary policy. Any possible conflicts of interest can be avoided by strict conditions and clear rules on how monetary policy and banking supervision are handled in a single institution.
• A common banking supervision must be democratically legitimised and controlled. The common banking supervision is therefore accountable to the citizens of Europe. We are in the process of working out the optimal design of this new accountability together with the European Parliament.

[...]

A genuine, integrated European financial market means repealing the close interaction between banks and states along national borders. When the new bank settlement rules are in force, states may step in only after private investors have been drawn upon. This approach is right because these clear rules ensure that investors can and have to assess their risks more accurately. 

The rules for bail-ins are not supposed to come into force until 2018. I hope that this time can be pushed further forward in the trilogue to give investors some higher degree of security. It is important that settlement decisions are taken at European level, the same level where in the future the common supervision will also take place. This means that rapid, effective decisions can be made to close banks that are no longer viable without putting the stability of the financial system as a whole into question. 

But who will actually decide that a bank is no longer viable? In answering this question, I see room for improvement in the current Commission's proposal. In my opinion, such a decision should lie solely with the banking supervisor and therefore should be taken in future by the ECB. Only then can decisions be made in an effective, coordinated manner without unnecessary wrangling over authority; and acted upon swiftly.

Full speech (in German)

English version now available

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