17 May 2022

SSM's Enria: Of temples and trees: on the road to completing the European banking union

We have identified the urgent need for banks to recover profitability, improve cost efficiency, invest in digitalisation and enhance the sustainability of their business model. Healthy profitability is the first line of defence in the event of shocks...

Thank you for inviting me to deliver this address at the Institut Montaigne. The Institut last year published a very topical report on the future of banking in Europe^[1]. The analytical part of the report points out the apparent paradox of a banking sector that has re-built significant strength and resilience, but still shows structurally low profitability and depressed market valuations. Indeed, also from our supervisory perspective, we can be satisfied with the achievements of the regulatory reforms in strengthening banks’ balance sheets and the progress in dealing with the legacy of non-performing assets since the start of the banking union. This new resilience has proved fundamental in supporting households, small businesses and corporates during the pandemic, and is currently an important defence against the adverse effects of the war in Ukraine on our economy. At the same time, we have also identified the urgent need for banks to recover profitability, improve cost efficiency, invest in digitalisation and enhance the sustainability of their business model. Healthy profitability is the first line of defence in the event of shocks and a pre-requisite for banks’ ability to attract investors and raise capital if needed. Therefore, when the Institut’s report calls on banks to reinvent their business model, this resonates with us and is well aligned with the ECB’s supervisory priorities.

But the report also correctly laments the incomplete nature of the banking union and the fragmentation of our banking sector, requesting policymakers to “[…] play their part to revitalise the banking sector by relaunching the European project”.

This is the topic I would like to focus on today. In light of the current ongoing debate at Eurogroup level^[2], I will argue that it is paramount we continue our progress towards completing the banking union. I will also highlight the areas in which, in my view, we should achieve progress as a matter of urgency, in order to support the necessary efforts banks are making to refocus their business model on a Europe-wide basis.

The banking union: temple or tree?

Since November 2014 European banking supervision has been responsible for the prudential supervision of the banking sector in the euro area and, since October 2020, in two more Member States – Croatia and Bulgaria – that entered into close cooperation agreements.

I would argue that the first pillar of the banking union has managed to deliver high-quality prudential supervision of the banking sector within our remit, which is actually the biggest in the world by asset size^[3]. Still, it is fair to say that since the inception of the banking union there has been no noticeable improvement in the level of integration of the banking sector in the area we supervise. We all know that the legal framework applicable to European banking supervision has some shortcomings. For example, despite being a European institution, the ECB often needs to apply national legislation in the supervision of cross-border banking groups as it is not fully harmonised with directly applicable European law.^[4] But while this has an undeniable adverse effect on the cross-border integration of EU banks, as I discussed last year in Ljubljana,^[5] I do believe that European banking supervision has led to a truly unified exercise of supervisory responsibilities. If we ultimately want to identify the root causes of the lack of progress in the integration of the euro area retail banking sector, we need to look at the lessons learnt from the past and consider broader, more fundamental questions of institutional design in the European Union.

To illustrate this point, it is worth going back to the debate at the intergovernmental conferences^[6] that led to the Maastricht Treaty being signed and the European Union being established.

Back then, in 1991, there were two competing schools of thought regarding the new European institutional framework, in particular in the work of the Intergovernmental Conference on Political Union.^[7]

On one side were those who argued that the new union should resemble a Greek temple – an edifice with separate, or parallel, pillars. The Community method would apply only to the first pillar, the old European Economic Community including the single market and the newly established Economic and Monetary Union, while the second and third pillars on foreign and security policy and justice and home affairs would instead be run through intergovernmental arrangements.^[8]

This was broadly the proposal for Treaty amendments presented by the Luxembourgish presidency in the first half of 1991, which was opposed by the Commission, the Parliament and some more integrationist Member States. Then, during the second half of 1991, the Dutch presidency tried to revive a Commission proposal where the Union structure would be more similar to a tree – with a single trunk but different branches for different policies^[9]. While approval processes and voting majorities might well vary across the various branches, the fundamental tenets of the Community method – political and legislative initiative from the Commission, enhanced role of the Parliament and the jurisdiction of the Court of Justice – would apply to all the different policies. In this way the essential supranational, some would probably say federal, elements of the European architecture would be preserved.

In the end, the Greek temple structure won the day. And although some historians and political scientists may disagree, I would argue that institutional progress in the European Union has proceeded along those lines ever since. Whenever some specific institutional reforms risk crossing a critical political line in terms of depth and breadth of European integration, the intergovernmental elements of the new structure would become more prominent, enabling the Member States to retain control of the process...

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