Asmussen put forward the ECB's views and said that the Cypriot case had been a salutary reminder of the importance of establishing banking union as swiftly as possible.
Despite the unprecedented steps taken so far, the banking sector has not yet been stabilised. The burden-sharing arrangement negatively affected depositor confidence and required the introduction of temporary and proportionate capital controls and restrictions on deposit withdrawals. Short-term risks are high, as the deep recession is expected to take a toll on banks’ balance sheets. The reliance of the largest bank on ELA continues to be exceptionally high. Hence, firm steps are needed to complete the financial sector reform so as to rebuild confidence in the viability of the banking system.
Let me now turn to the lessons which we can draw from the experience in Cyprus. The Cypriot case has been a salutary reminder of the importance of establishing banking union as swiftly as possible. Only then we will be able to break the negative interaction between sovereigns and their banking systems.
First, it has shown that the speedy entry into force and implementation of the single supervisory mechanism (SSM) is essential. The centralisation of supervision as well as the effective use of macro-prudential tools should help identify and prevent the persistent accumulation of financial imbalances at an early stage. This will help ensure a more resilient and viable financial sector. A financial sector that is capable of contributing to sustainable growth.
Second, it has demonstrated that we urgently need a European framework for the resolution of financial institutions. This should include a clear set of commonly known ex ante rules for bail-in, buffers of ‘bail-inable’ assets and depositor preference. Regarding the latter, the new framework should place depositors at the top of the creditor hierarchy and ensure that the role of DGS in resolution is limited to insuring eligible depositors. This will contribute to reducing the risks to financial stability by providing legal certainty and predictability to resolution.
Third, it has revealed the pressing need to establish a single resolution mechanism (SRM). The SRM is a fundamental pillar of the banking union and is a necessary complement to the SSM. This requires a strong authority at its centre which should provide timely and impartial decision-making which minimises the costs of resolution. The SRM should have a European resolution fund at its disposal which should have access to a temporary and fiscally neutral public backstop.
Full speech
See also video: Troika's representatives under scrutiny over Cyprus in EP © EPP Group
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