04 September 2013

BoF/Hakkarainen: Banking Union in the Nordic context

Hakkarainen emphasised the Nordic perspective - but with a Finnish twist, Finland being the only country in the Nordic region which is a member of the euro area, and thus by definition a full participant in the Banking Union project.

The disparity between international banking and national supervision and resolution powers have been the Achilles heel of the European banking market, a problem that is now finally being addressed. It is regretful that we had to wait until the recent crisis before progress started on this front.

This is particularly important for the Nordic banking market, which is exceptionally integrated and interconnected, while the countries’ starting positions are so divergent, not all being members of the euro area. Mr Hakkarainen hopes that the different currency arrangements in the region will not prevent progress in supervision.

An important impulse for the establishment of the Banking Union came from the desire to protect taxpayers and reduce their liability in the banking system. However, in his view, the SSM should also offer significant benefits to the supervised banks: supervisory requirements will be harmonised across borders and there will be one entry point into supervision. Group-level supervision will be emphasised rather than the supervision of subsidiaries.

This should be quite beneficial especially for those banks which have large cross-border activities. Big Nordic banks are prime examples of such banks. Clearly, the SSM will ease banks’ international operations and help ensure a level-playing-field for banks. Also the benefits of stronger investor confidence which should result from the strong, objective and high-quality supervisory work can be added.

Finally, the billion dollar question: would the recent financial crisis have been avoided in Europe if the EU had established the Banking Union before the problems surfaced? Mr. Hakkarainen thinks probably not completely, since the reasons for the crisis were to a large extent global in nature. But the crisis would likely have been milder and less damaging. The European market would have been less fragile and the authorities could have been able to act more quickly and more decisively. Both supervision and resolution would have contributed to that.

On the supervision side, better, more credible and internationally uniform supervision would have reduced uncertainty among investors and politicians about the condition of the banking systems of the highly indebted countries. That would have made markets more resilient and avoided some of the costs of the drying-up of the interbank market, which hurt even the fundamentally healthy banks.

On the resolution side, if clear ex ante rules for dealing with problem banks had been in place when the crisis hit, the resolution of unviable banks could have been enforced more quickly and more efficiently.

The bail-in tool would have been available to reduce the cost of the crisis to taxpayers. Also, favouring of “national champions” would have been avoided, so recovery and resolution policies would have been more consistent and effective. Healthy competition in the banking sector could have been restored sooner without compromising the stability of the system.

Full speech

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