09 July 2012

Mark Hoban: "I strongly support the euro area's decision to pool sovereignty and express solidarity through a banking union"

Financial Secretary to the Treasury, Mark Hoban MP, welcomed the decisions taken by the Eurogroup and the European council to establish a banking union, and said that the crisis had shown why a banking union is a necessary part of monetary and fiscal union.

The crisis has shown us why a banking union is a necessary part of  monetary and fiscal union. One of the largest fiscal risks faced by a government is the contingent liability for its banking sector. When countries need to deliver core financial stability tasks, like protecting depositors, and are unable to, it may be necessary for other Member States in the currency union to work together to protect the currency as a whole.

As well as the mutual dependence of state and bank, we have also seen the enhanced interdependencies between banking systems within a single currency – as contagion has spread from Greece to Spain rather than to countries outside the euro area. And we have seen how the single interest rate of the countries in the euro area can feed bubbles in one country whilst delivering excess liquidity in others. The impact of this on economic performance is of course a strong driver of risk in the banking sector.

For all these reasons, I see banking union as a necessary part of monetary and fiscal union.

• A mutualised deposit insurance scheme for insured deposits – to ensure consumer confidence where states cannot stand behind failed banks.
• A common fiscal backstop for crisis management.
• And a eurozone-level prudential supervisory authority – to align fiscal and supervisory responsibility.

So I strongly support the euro area's decision to pool sovereignty and express solidarity through a banking union.

The UK has a vital interest in a fair, competitive and vibrant market. And we welcome the decisions that have so far been taken:

• We welcome ensuring a key role for the ECB as supervisor – with the credibility and legal mandate it carries.
• We welcome the identification of the ESM as a tool for banking interventions, with the capacity to recapitalise banks directly.
• And we welcome the European Council’s statement that should Member States with a common currency wish to go further to coordinate and integrate their policies, they must respect fully the integrity of the single market and the EU as a whole.

There are now a number of design issues that need urgent attention:

• What will need to be done to Directives on the Deposit Guarantee Schemes and  Resolution and Recovery?
• What more needs to be done in CRD IV, particularly as flexibility in macro-prudential supervision becomes even more important?
• What will be the scope of the banking  union – how many banks will be supervised by the ECB? This cannot be limited to the biggest banks only, since systemic risk comes from smaller institutions too.
• How will we ensure the EBA remains focused on the internal market?
• Do we still need resolution funds, now that an ESM can be used?
• Who is in charge in a crisis? The euro area will need a credible resolution regime.
• What are the liabilities and risks already in the system?

These are just a few of the questions that spring to mind – I am sure there are more. We will work closely with our European colleagues to ensure that a strong solution can be found that benefits all.

In completing the design, we will need a system with strong supervisory foundations and practice, that maximises the benefits of the banking union, while mitigating the risks.

Maximising the benefits from common supervision and the mutualisation of risk - breaking the link between sovereign and bank. What President Hollande calls ‘integration solidaire’.

A banking union that erects barriers and looks inwards would not be in anyone’s long-term interests. To allow the protectionism to take hold and the single market to fragment will do nothing but shrink the global economy at a time when it desperately needs help to grow.

All EU Member States require open capital markets to support our corporations. And ultimately, a global reserve currency like the euro or dollar can only maintain its international standing if it can freely be traded and cleared beyond the 17 eurozone members, across the world.

Full speech

© HM Treasury