18 November 2013

ECB/Mersch: On the road to a Banking Union - The way forward from the ECB's perspective

Mersch reflected on how the fundamental idea behind the Banking Union is reflected in the practical design of the single system of banking supervision, and what else could be done to be faithful to it when banks have to be wound up.

Let us look, first of all, at the fundamental idea of ensuring uniform conditions. If we are to have an effective European policy, there are decisions that have to be taken when it comes to implementation. We can have rules that go beyond mere harmonisation – very rigid rules that do not allow for any exceptions. Or, alternatively, we can have a set of rules that contains a certain amount of room for discretion, one that takes account of the particular circumstances of individual cases. That, however, will necessitate a central body to apply and implement those rules. Exceptions must be objectively justified and cannot reflect the special interests of individual countries. That is the only way to guarantee fair and consistent basic conditions across Europe.

What does this mean in practice?

It will begin with the comprehensive assessment of the major banks of the euro area, which will be the focus of our new supervisory function. This stocktaking exercise will comprise three elements: a risk assessment; the balance sheet assessment itself (analysis of the quality of assets); and a stress test, which we will conduct in close cooperation with the European Banking Authority (EBA).

The question, then, is how shortfalls can be remedied. Initially, the banks concerned must use the market to cover their capital needs. However, in the event that individual banks are unable to raise the necessary capital, we also require robust alternative solutions to provide them with support.

However, this comprehensive assessment is merely preparation for the actual supervision, which we will begin in one year’s time. The same principles of uniform basic conditions and maximum use of national expertise will apply in the day-to-day work of Europe’s banking supervisors.

The single supervisory mechanism ensures a harmonised system of banking supervision. At the same time, supervision of smaller institutions continues to be carried out on a decentralised basis. This enables us to ensure that everyone is subject to the same conditions – fully in keeping with the further integration of Europe’s Single Market – while at the same time using the expertise of national supervisors.

Bank resolution

The existing close links between countries and their banks are to be loosened using harmonised European rules on recovery and resolution. Ultimately, this always comes down to the same question: Who pays when a bank gets into difficulty? The planned directive harmonising the recovery and resolution of banks (the BRRD) provides for a clear hierarchy of liability in this regard. It first falls to the banks’ owners, the shareholders, and then the creditors. The government can only get involved as a very last resort.

In my view, however, these rules still allow too much room for manoeuvre at national level. And that brings me back to the fundamental concept. A certain amount of room for manoeuvre within a harmonised set of rules can be entirely appropriate from the perspective of financial stability. In that case, though, those rules must be applied at a supranational level if the same conditions are indeed to apply everywhere. If decisions are taken by national decision-making bodies, the rules have to be so rigid that we end up with a uniform set of European conditions.

Once the single bank resolution mechanism is in place, the planned resolution authority will apply the rules everywhere in a consistent manner. A certain degree of discretion will then certainly be justified in the interests of financial stability, as it will be accompanied by a central implementing authority.

We now need to turn this proposal into a functioning resolution mechanism by the target date of the beginning of 2015. For we in Europe urgently require a full Banking Union with both fundamental elements: harmonised supervision and harmonised resolution. As the fund is to be financed by the banks, which will take some time to arrange, the primary question concerns the issue of transitional solutions. These, in turn, raise questions relating to the division of responsibilities. Mistakes of the past at national level should not, in principle, be paid for by a joint fund. However, if there is no willingness to establish a stopgap measure, the credibility of this new architecture strengthening the single currency will be questioned.

Full speech

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