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26 November 2014

Vítor Constâncio: The role of the banking union in achieving financial stability


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The banking union can be seen as the biggest European reform after the inception of the euro, with vast implications that go well beyond the problem of the sovereign-bank loop.


Speech by Vítor Constâncio, Vice-President of the ECB, at the FT Banking Summit “Ensuring Future Growth”, London, 26 November 2014

The banking union is a structural and institutional step with wide implications for the deepening of European integration. Its two key elements – the Single Supervisory Mechanism and the Single Resolution Mechanism – will help address the negative loop between banks and sovereigns, notably by means of direct recapitalisation of European banks that would not overburden already indebted sovereigns.

Another important objective of banking union is to overcome financial fragmentation and promote financial integration. There are four ways by means of which I expect the SSM to make a difference to banking in Europe: by improving the quality of supervision; by creating a more homogenous application of rules and standards; by improving incentives for deeper banking integration; and by strengthening the application of macro-prudential policies.

There is a need to broaden the scope of the existing macro-prudential policy toolkit in general and also to broaden the toolkit available to the ECB in particular. One reason is that macro-prudential policy should become a fully effective policy to smoothen the financial cycle.

"Let me briefly list some of these extensions to the macro-prudential apparatus that I think are necessary.

First, we need to improve the quality and range of data to cover the whole financial system, in order to have credible notion of the overall development of leverage and maturity transformation.

Second, exposures of banks to the shadow-banking sector should receive more specific limitations. A specifically tailored treatment was missing in the Basel Committee's large exposure rules that were agreed earlier this year. However, the EBA is currently developing principles that will provide a basis for closer management of this activity in future.

Third, macro-prudential authorities should have the power to identify and require that systemically important non-bank financial institutions should be subject to more enhanced surveillance standards similar but not equal to the bank supervision regime, as it is the case in the U.S.

Fourth, we would like to see counter-cyclical margin requirements for the extension of credit for trading in securities markets. The Federal Reserve Board has this competence through the so-called Regulation T.

Fifth, given the tight interaction between credit, housing and business cycles, all macro-prudential authorities should possess powers to directly regulate real estate and housing credit. They are already available to U.K. or Irish authorities. Loan-to-value or debt-to-income limits are obvious measures that could be considered 

Finally, over the-counter derivatives should be traded on exchanges or electronic trading platforms when they are sufficiently standardised and cleared through central counterparties – as was committed to in the Pittsburgh G20 Summit."

Full speech



© ECB - European Central Bank


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