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Ten years ago, on 15 October 2013, the EU Council approved the regulation launching the Single Supervisory Mechanism. It was the most significant step in European integration since the introduction of the euro. And there were two main reasons for taking it.
First, it would lead to stricter and more uniform supervision – a single supervisor enforcing a single set of rules for a single banking market.
That would, in turn, make it possible to establish a true banking union, with a common safety net. And a banking union would strengthen the monetary union by ensuring that bank deposits were seen as equally safe everywhere.
As Andrea Enria eloquently put it, “only unified supervision and an integrated safety net can make sure that one euro has the same value and is afforded the same protection regardless of the Member State in which it is deposited”.[1]
Second, single supervision would help make monetary policy more effective, because a weak banking system can complicate our task of stabilising inflation – in both directions.
When central banks are easing policy, a fragile financial sector can impede the transmission of lower rates to the economy, especially if banks are unable to lend. We saw this after the euro crisis when banks were deleveraging as the ECB was cutting rates.
At the same time, weak banks can also interfere with rate hikes. If monetary policy gives disproportionate weight to financial stability risks, it might tighten less than it ought to.
Setting up a single supervisor was a necessary condition to achieve both these goals. But, of course, there was no guarantee of success. It had to be tested by events and shaped by leadership – notably that of Andrea and his predecessor, Danièle Nouy.
In my remarks today, I will explain how European banking supervision has brought about key improvements to the supervisory landscape and to the effectiveness of monetary policy.
Three improvements to the supervisory landscape stand out.
First, European banking supervision has led to sounder banks, thanks to supervisors enforcing tougher regulatory standards and topping them up where necessary.
The aggregate Common Equity Tier 1 (CET1) ratio of supervised banks stood at 15.7% in the second quarter of this year, up by 440 basis points since the start of European supervision. Banks benefit from liquidity coverage and net stable funding ratios well above their minimums – at 158% and 126%, respectively. And non-performing loans fell from around €1 trillion in 2014 to below €340 billion at the end of last year.
Second, the single supervisor has made supervision more uniform, meaning that supervisory practices are now applied in a consistent way.
For example, single supervision has led to capital add-ons being applied much more consistently across banks. When European supervision began, the correlation between banks’ risk profiles and their capital requirements across Europe was just 40%. This meant that, for the same risk profile, supervisors were applying very different capital requirements. Today, however, that correlation has risen to 86%.
Third, European supervision has helped us identify common priorities in terms of risk management and address them in a forward-looking way...
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