17 June 2013

ECB/Asmussen: Prospects for a European banking union

Translated from the German

Asmussen started his speech by giving an overview of recent developments on the financial markets and by listing the risks to the European financial stability, as seen from the perspective of the ECB, namely:

• a further decline in bank profitability, coupled with additional credit losses and a weak economic environment
• the slowdown in the willingness to reform in the countries of the euro area
• bank financing, especially in the problem countries, and the apparent fragmentation of the banking system

Both at a national and European level, the reintegration of the financial markets should be promoted quickly, he argued. "A sustained normalisation of financial conditions in Europe will only be possible if a major design flaw of monetary union is tackled on a structural level: with the creation of a European banking union."

A European banking union would bring together regulation, supervision and resolution of euro area banks on the European level. The ECB's monetary policy - and in particular its non-standard measures - had contributed to the normalisation of financial market conditions. "But that alone is not sufficient. The mandate of the ECB and the range of its instruments are limited", he continued. A European banking union was supposed to break the vicious circle linking banks' balance sheets to sovereign risks.

Single Supervisory Mechanism under the roof of the ECB

The single supervision would have a number of definite advantages, Asmussen said:

• First, a central European bank supervision could rely on more comprehensive information than the national supervisory authorities. Cross-border risks that might threaten the banking system could be recognised earlier and more effectively.
• Second, any decisions would be taken centrally and free of national interests.
• Also, a European banking supervision would contribute significantly to financial market integration, and counteract the fragmentation of markets. Integrated financial markets would in turn ensure that the ECB's monetary policy worked in all Member States of the monetary union to the same effect.

"The ECB will oversee systemically important banks directly. The three largest banks in each Member State will automatically belong to the directly supervised institutions, regardless of their absolute size. Thus, in total about 130 to 150 eurozone banks (or 85 per cent of total assets) will be supervised directly by the ECB. We will assign bank licences, but also have the power to withdraw them. We will make sure that equity and liquidity requirements as well as debt limits are adhered to and we will be able to restict large exposures, perform stress tests and supervise financial conglomerates", Asmussen explained. 

Single Resolution Mechanism

"But a unified supervisory mechanism is only one part of the banking union", Asmussen elaborated. The single resolution mechanism (SRM) would be another integral part, as there would most probably be instances of bank failures even after the introduction of a single supervisory mechanism. Ailing banks would have to be closed and liquidated to prevent a "zombification" of the European banking sector.

With an SRM, rapid and impartial decisions could be made by the European resolution authority. The settlement costs for the resolution of any given bank would have to be borne by the private sector. Distressed banks would therefore have to give up on the hope that costs could be passed on to the taxpayers. The necessary tools for orderly liquidation have been described in the proposal for a directive establishing a framework for the restructuring and settlement of credit institutions and investment firms (Bank Recovery and Resolution Directive, BRRD).

Preferably, a newly created European institution should be entrusted with the task of banking resolution. But if this is impossible to implement in the short term, the second-best option would be to transfer this responsibility temporarily to the ESM. The European resolution authority should also have access to a European settlement fund.

"In my opinion, the order in which losses should be distributed is as follows: first of all, the actual shareholders should have to pay, followed by subordinated bondholders. In the third place, the general bondholders and other non-priority creditors are to follow. Only in the very end should unsecured creditors and depositors fall into the category of those who have to pay", he concluded.

Full speech (in German)

© ECB - European Central Bank