19 November 2012

Bundesbank/Weidmann: The concurrence of crisis management and regulatory policy

If properly structured, a banking union can be an important building block, or even a pillar, of stable monetary union. But is it also the key to solving the crisis? No, it is not, and to expect that would be to demand too much of it. The banking union is a future-oriented concept whose purpose should be to help prevent future risks or at least to help deal with them better.

However, the present problems affecting the banking system are the result, above all, of past undesirable developments at the national level. The risks in the balance sheets arose on the watch of national authorities, and the respective member states have to deal with them. This is the only way to maintain a balance of liability and control. To communitise these legacy burdens through a banking union would run counter to the purpose the banking union was established for: it would then constitute a financial transfer. If policymakers believe that transfers of this kind are necessary, then they should also refer to them as such. In some countries, national fiscal policy could certainly bear the balance sheet legacy burdens; in other cases, the rescue mechanisms would be at the ready to grant conditional financial assistance. What is more, the expectation that legacy problem can be passed on to the future banking union and, therefore, to the other member states threatens to protract the reform process in the banking system. This is because it could then be worthwhile for those affected to put off cleaning up banks’ balance sheets until the banking union is in place.

But since the banking union is a concept for the future and because it cannot, moreover, solve the current crisis, it should be introduced quickly but not over-hastily. From a conceptual perspective, the banking union is a much-needed addition to monetary union, but its implementation faces many hurdles and raises a number of questions:

• What banks should be subjected to common supervision? Only the systemically important banks, or all of them?
• How will the banking union include countries that are not part of monetary union but are members of the EU and, therefore, of the single market?
• How will the common resolution and restructuring mechanism draw on taxpayers’ money?
• What form will the EU legal framework for the banking union take?
• How can we make sure that the sovereign tasks of banking supervision are adequately legitimised and are subject to parliamentary control?
• What is the banking union’s position vis-à-vis other policy areas, in particular macroprudential policy and monetary policy?

Many of these questions will be even more pressing if the ECB is made responsible for banking supervision. The banking union has to ease the pressure on the single monetary policy – but in terms of practical implementation, conflicts of interest between banking supervision and monetary policy persist. That is why both functions have to be strictly segregated. Though feasible, such segregation would be difficult to realise – difficult from an organisational perspective as well as legally. Another challenge is that, on the one hand, supervisory decisions must at least be subject to indirect parliamentary control; but on the other hand, the central banks’ independence must not be undermined. And in connection with the legitimisation of supervisory decisions, there is the question of voting modalities. Since decisions of this kind can also entail fiscal costs, the only logical answer would be to weight votes, for instance in accordance with capital shares.

Mr Weidmann is convinced that there is a need to answer these questions if the banking union is to prove a success – and it will be possible to answer them. The banking union is not a remedy for acute problems, but constitutes regulatory policy in the best sense. It offers the opportunity to add an important pillar to the monetary union structure, thereby safeguarding monetary union as a community of stability. And that should be our prime objective.

Full speech

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