While the eurozone's planned Banking Union will help to restore trust in the currency bloc's banks, it also carries a number of risks such as driving banking activities to the shadow banking sector, argued Ewald Nowotny, member of the ECB's governing council.
"There is a danger that intensified regulation in the banking sector might cause important and risky business activities to be shifted into less regulated areas, such as shadow banking entities", Ewald Nowotny said at an Austrian Central Bank conference on the Banking Union. The financial crisis of 2007 and 2008 show that shadow banking activities can pose a risk to financial stability, he said.
Mr. Nowotny also warned that "competitive distortions" could arise if national differences in supervision or in the implementation of risk mitigating policies continue to exist. He added, however, that there is an argument in favor of "some degree of differentiation below the euro area level" due to cultural and language differences.
While the ECB is set to take on the role of single bank supervisor, or single supervisory mechanism, for the euro zone's largest banks, Mr. Nowotny said "there is a strong argument for keeping the resolution agency clearly separate from the ECB".
"As the ECB is set to be an exacting and respected supervisor, banks subjected to its supervision will enjoy high confidence, and this should result in a reduction of the uncertainty premiums", said Mr. Nowotny. It is in everyone's interest if "as many countries as possible decided to join", he added.
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