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Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, at the Euro Finance Week, what can be and cannot be expected from the new European banking supervision.
Taking banking supervision from the national to the European level has been the biggest step of financial integration in Europe since the introduction of the euro in 1999. This big bang created a new universe for the banks and the financial markets.
There is no doubt: European banking supervision is an important step forward in ensuring financial stability in the euro area. Nevertheless unrealistic expectations are the roots of complacency and, consequently, of disappointment.
European banking supervision is just the first pillar of the envisaged banking union. It has to be supplemented with the European resolution mechanism for banks. This second pillar of the banking union will be erected in 2016. Eventually, the banking union will provide a stable framework for the banking system and strengthen market forces.
This, in turn, puts more responsibility into the hands of banks. It is up to each individual bank to ensure its own stability and profitability. This requires the banks to rethink their business models and to rethink their culture. Regulatory measures like TLAC that will abolish implicit guarantees for banks will also necessitate changes in banks' behaviour for the better.
Mr. Dombret said: “The original role of banks is to service the real economy. Putting this idea back into the heads of bankers would contribute greatly to making the financial system more stable. We have to do away with a culture in which everything is allowed that is not explicitly forbidden. We need a culture which encourages bankers to look beyond the horizon of short-term returns.”
If banks succeed in creating such a culture, they will eventually regain the trust of the people that got lost in the crisis. Regulation and supervision can play a supporting role, but the burden ultimately lies with the banks.