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The European banking union is the centrepiece of these efforts. The first pillar, European banking supervision, was set up in 2014 to ensure that banks across the euro area are supervised to the same high standards. The second pillar of the banking union was established in 2016: the Single Resolution Mechanism. This ensures that banks can fail in an orderly manner.
This new institutional set-up is a good basis for reducing risks, but it needs further refinement. Regulation, for instance, needs to be further harmonised. To reap the full benefits of the banking union, a harmonised regulatory framework is needed.
First, there is the issue of options and national discretions (ONDs). While some of these ONDs have been harmonised by supervisors, others lie in the hands of national legislators. More generally, it stands in the way of a truly European banking market, as do the other ONDs that fall within the competence of national legislators.
She continued: “Second, recent bank failures have shown that we need to further harmonise the tools for crisis management. We need to remove the overlap between standard supervisory measures and early intervention measures, for instance. As we are obliged to apply the least intrusive tool, the overlap often prevents us from taking early intervention measures. We also need to expand our toolbox to include a harmonised moratorium tool. Finally, national insolvency laws need to be aligned. All this would make the Single Resolution Mechanism even more effective.”
These measures will help to better contain risks in the future. However, there is need to reduce the risks faced today. Non-performing loans (NPLs) currently pose one of the biggest risks to the European banking sector. European supervisors closely monitor how banks approach NPLs, and in 2017 and 2018 the ECB published guidance on the subject. The aim is not only to resolve the current NPL problem, but also to keep it from recurring in the future.
Finally, legislators also need to address the issue of NPLs. Across the euro area, legal and judicial systems differ substantially in terms of effectiveness and efficiency when it comes to dealing with NPLs. The time and resources required to resolve NPLs thus differ from country to country. National legislators should strive to improve legal and judicial frameworks. In the end, tackling NPLs requires a joint effort by banks, supervisors and legislators.