14 May 2014

ECB/Mersch: Powering into the future – Germany and Europe

Yves Mersch, Member of the Executive Board of the ECB, spoke on how Europe’s banking sector benefits from single supervision; why the ECB is acting within its powers; and what the advantages of a single financial market are.

How Europe’s banking sector benefits from single supervision

In just under six months, the ECB will take over direct supervision of 80 per cert of banking assets. We started preparing for this half a year ago by conducting a comprehensive assessment of the euro area’s most important banks. The basic premise is to obtain a precise picture of the health of the banks before we start the actual task of supervision. But the comprehensive assessment is more than just an accounting exercise. The task is to restore investor confidence. Although we are still in the middle of the process, we are already seeing some positive results. In the last few months, many banks have been tidying up their books in preparation for our review.

And this is clearly reaping rewards. The price/book ratio of the euro area’s most important banks is now just under 0.9, and is thus closer to par than just a few months ago. So there are already signs that the European banking sector is benefiting from single supervision – even before we have begun the actual task of supervision.

The process itself is designed to be highly transparent and consistent. At the national level, staff of the ECB and of the supervisory authorities of other Member States are evaluating implementation of the comprehensive assessment. Although the national supervisory authorities are providing us with assistance, the final review is always performed centrally by the ECB, to ensure that all the results are comparable. It is important that the central bank has ultimate discretion and power, so that national discretionary margins can be reconciled.

Clearly defined powers

The decision to entrust banking supervision to the ECB was above all a pragmatic one. Legislators were looking for a viable European solution within the existing agreements. The aim was to eradicate the previous supervisory culture, in which national supervisors occasionally had an incentive to take decisions that favoured national interests in particular. This was not always conducive to financial stability in other Member States or in the euro area as a whole. And many in the ECB were also somewhat sceptical to start with. When all’s said and done, our reputation is at stake. That’s why we have always insisted on certain basic principles, including a strict separation between supervision and monetary policy.

These basic principles also apply during actual implementation. For example, we separate monetary policy and supervision by separating employees who are involved in supervision from monetary policy at an organisational level. Supervisory work is planned and carried out by a separate body, the Supervisory Board. The Board has already started meeting and is responsible for the ongoing preparations for single supervision. The ECB’s Governing Council convenes separately on issues of supervision. And we are also accountable separately for supervision and for monetary policy.

The benefits of a single financial market

Three reasons why a single architecture for the euro area financial market is beneficial:

1. Price stability in a currency union pays no heed to national borders; and likewise financial stability – or instability – does not stop at national borders either.
2. The purpose of Banking Union is a single capital market. The more capital flows within the euro area normalise, the more long-term Bund yields will do the same. These act as a benchmark or anchor for savings rates.
3. Savers are also taxpayers. As soon as Banking Union – with its two key elements of a single supervisory mechanism and a single resolution mechanism – is up and running, taxpayers’ money will be better protected and less in demand for bailing out banks than was previously the case. 

Full speech

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