07 June 2023

ECB's de Guindos: Banking Union and Capital Markets Union: high time to move on

The European banking sector has proven resilient. And the enhanced regulatory and supervisory framework put in place following the great financial crisis has proven its worth. But it is still incomplete ...

It is a great pleasure to be participating in this year’s joint conference on financial integration. This event offers an excellent opportunity to reflect on key developments in the financial sector over the past year and to reassess priorities for advancing the integration, development and safety of the financial system.

Recent developments and the euro area banking sector

In recent months, bank failures in the United States and Switzerland have affected financial markets worldwide. This “real-life stress test” has provided valuable insights and lessons for the euro area banking sector and for our regulatory and supervisory framework.

The European banking sector has proven resilient. And the enhanced regulatory and supervisory framework put in place following the great financial crisis has proven its worth. But it is still incomplete – the Basel III agreement still needs to be transposed into EU banking regulation in a full and timely manner. We cannot be complacent.

During the recent bank failures, deposits were withdrawn much faster than during the great financial crisis. Silicon Valley Bank lost more than USD 40 billion – almost 30% of its deposits – in a single day. The extraordinary speed of deposit withdrawals was driven by the widespread use of online banking and the rapid dissemination of news via social media and was compounded by the highly concentrated customer base.^[1] In this ever-faster digital world, banks, supervisors, central banks and legislators need to review the tools for safeguarding liquidity conditions and financial stability.

The turbulence seen in financial markets this spring is a timely reminder of the benefits of strong regulation and supervision. While adequate regulatory standards are the first line of defence against bank failures, they must be supported by a second line of defence in the form of steady, powerful and agile supervision.

Harmonised and effective supervision and an enhanced resolution framework

ECB Banking Supervision has successfully developed and promoted harmonised supervisory practices. It started to closely monitor risks related to rising interest rates when the first signs of inflationary pressures emerged, long before the bank failures in the United States. The European Commission^[2] and the European Court of Auditors^[3] recently confirmed that the ECB has established itself as an effective and mature supervisory authority, and the ECB has already started to implement their recommendations.

The EU has made considerable progress in crisis management by establishing a robust framework for dealing with banks in financial difficulties. While they are not a direct response to the recent turmoil, we strongly welcome the European Commission’s proposed changes to the crisis management and deposit insurance framework. In particular, we support expanding the scope of the resolution framework to ensure that the failure of small and medium-sized banks can be addressed in a more effective and harmonised way. At the same time, ensuring adequate resolution funding is critical to make resolution feasible for smaller banks. This includes using deposit guarantee schemes to help unlock access to the Single Resolution Fund and introducing a single-tier depositor preference. The proposals form a coherent package which must be preserved in its entirety. We call on the co-legislators to adopt it swiftly, preferably during the current institutional cycle.

The events of this spring have demonstrated the need for effective and agile crisis management frameworks for banks of all sizes. To complete the crisis management toolkit for large banks in the EU, we also need to make progress in other areas, such as liquidity in resolution and a backstop to the Single Resolution Fund.

The missing third pillar of banking union

The large gap in our institutional framework is still the missing third pillar: the European deposit insurance scheme. As long as deposit insurance remains at the national level, the sovereign-bank nexus will continue to be a source of fragmentation in the banking union, as the level of confidence in the safety of bank deposits may differ across Member States. In a crisis, we run the risk of deposit outflows towards other Member States and non-banks, thereby exacerbating systemic liquidity stress. An incomplete banking union is a key vulnerability for the EU banking sector and hampers progress towards greater financial system integration.

Furthermore, as firms broaden their funding sources and diversify away from bank loans, there needs to be a greater focus on financing through marketable debt securities and equity instruments. This lies at the heart of the capital markets union (CMU) project.

Implications for the capital markets union

Completing the CMU is essential for three reasons.

First, the CMU strengthens the resilience of the euro area economy through private risk-sharing.

Deep and integrated capital markets provide opportunities for effective risk-sharing. This is essential for financing the real economy and limiting fluctuations in economic activity. However, recent ECB analysis shows that, while euro area capital market integration has improved over the last 20 years, it remains rather modest.^[4]...

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