05 April 2013

BIS: Yves Mersch: The Banking Union – a European perspective: reasons, benefits and challenges of the Banking Union

The importance of preventing sovereign problems from spreading to banks (e.g. Greece) and preventing banking problems from spreading to sovereigns, (e.g. Ireland, Cyprus), is a key lesson drawn from the crisis. Actual or expected bank bail-outs by national governments increase borrowing costs for sovereigns, while also driving up banks’ funding costs even further. This “doom loop” undermines national efforts to re-establish fiscal sustainability.

Moreover, growing pressures in funding and lending markets have led to a fragmentation of the euro area banking system along national lines. The funding costs of banks and the correlated borrowing costs for their respective sovereigns have increased, particularly in the peripheral economies. Countries that lose market confidence become progressively dependent on domestic sources of funding, more prone to capital outflows and less responsive to monetary policy. The divergence in bank funding conditions at national level in turn gives rise to cross-country differences in lending conditions. Lending conditions for households and firms in the periphery have become tighter than they should be given the prevailing monetary policy stance. This results in an inefficient allocation of funding across the euro area and hence has a negative impact on growth and employment.

The establishment of a Banking Union would help to break this negative feedback loop between sovereigns and banks.

The establishment of the SSM must be seen in a broader perspective. The SSM is a key element of the European Banking Union which itself is embedded in the process of further European integration. Among the achievements on the path towards a fiscal and economic union in Europe, we should reap the benefits from the recent dynamics of institutional reforms by building the Banking Union rather than stepping on the brake. The corresponding tightening of economic links will ultimately require institutional adjustments with a view to democratic accountability regarding the transfer of sovereignty; this concerns the European Parliament and the European Commission and will require treaty adjustments. This is the price for a well-functioning Monetary Union, in which the ECB focuses on price stability while ensuring that financial stability does not stand in the way of its primary objective.

For the ECB, and for the more seasoned authorities that carry out supervision in the Member States, the new supervision mechanism will represent a sea-change, a “new frontier”, comparable in many ways with that of creating a new currency and a new central bank before the start of this century.

The ECB is keenly aware of this and consequently puts an enormous focus on the careful, yet efficient, execution of the preparatory work, drawing on all available sources of expertise, both internal and external.

However, as the preliminary agreement between the European Parliament, the Commission and the Council from 19 March is now being renegotiated further to a new request, a delay in the final adoption of the SSM Regulation cannot be excluded. This would constitute a risk to the timely start of the SSM’s operations in mid-2014 and generate legal uncertainty. A policy of procrastination, however, would send the wrong signals. Both the SSM and the SRM are elementary building blocks for the reintegration of Europe’s banking landscape. So they must be implemented swiftly and decisively.

Full speech

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