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One of the paths out of the crisis is the creation of a Banking Union. Large parts of the banking industry in Germany have resisted being put under European supervision. Yet, after the global crisis, the German banking system needed substantial government support, even more than Spain, according to the IMF. Clearly, all was not well with German banks. What are your expectations for the results of next year's assessment?
The German government’s position was, from the beginning, in favour of a common European supervision. As to the comprehensive assessment, I do not speculate about possible outcomes. Rather, I would like to stress that it is key to apply uniform and strict standards in the exercise. As regards Germany, banks have already spent considerable efforts on cleaning their balance sheets – some as part of the Commission’s state aid decisions, some in reaction to EBA stress tests, and some for other reasons. The balance sheets are in better shape now than they were a few years ago. Core capital ratios of the eight largest banks in Germany have more than doubled between December 2010 and June 2013.
Besides, the Banking Union is a necessary step to complement the economic and monetary union, but won’t solve the current crisis. In particular it is not designed to deal with legacy problems. They arose under national responsibility and they have to be solved nationally.
Even more contentious than the SSM are the modalities of the SRM. Would not a network of national authorities, as Germany is proposing, risk falling captive to national instances, as it happened in the past years, and therefore not be credible?
A sound legal basis is a prerequisite for the SRM to work effectively and inspire confidence. Past experience tells us that resolution action will be legally challenged, and that won’t be different with the SRM. We must be sure that the SRM will stand up in court; otherwise we will have done a disservice to financial stability. Thus, governments should work towards a Treaty change. Until this is achieved, the network proposed by the German government is a pragmatic approach that is legally secure.
Going beyond legal arguments I would also like to recall that the network proposal of the German government does provide for a considerable degree of European decision-making, as there would be binding mediation if national authorities cannot agree. This is a prerequisite for swift decisions in emergencies.
There is going to be a hierarchy in the bail-in of creditors to avoid as much as possible the use of taxpayers' money. However, in the case of German banks and more recently of a Dutch bank, the opposite principle was followed. Is this another case, as it happened with the breach of the first version of the Stability Pact, where core countries preach one thing but do the opposite when it suites them?
In the cases you referred to, these bail-in instruments were not yet available, and the instruments we had at our disposal were not well suited to the challenges of the financial crisis. Decision-makers at the time faced a choice between the devil and the deep blue sea: Send the bank into insolvency, with all the ramifications for financial stability this might have had, or bail it out with taxpayers’ money? Both options were undesirable, and decision-makers picked the one which they deemed less undesirable. To avoid this dilemma in the future, we are currently working on a recovery and resolution regime that has to allow for the orderly winding-up of a failing institution without creating systemic risks and leaving the taxpayer to foot the bill. If this regime is designed and applied properly, the burdens of bank failures will be borne primarily by shareholders or creditors. Therefore, I would prefer to introduce bail-in rules as early as possible and ideally together with the BRRD and the start of the SRM.
You have advocated the end to the risk-free treatment of all sovereign bond holdings of banks in terms of capital requirements, to impose more market discipline and break the link between sovereigns and banks. Isn't there a risk that this renews turbulence in the government bond markets now that some of them seem on the ment?
In my view a reassessment of the regulatory treatment of sovereign bonds is crucial as a complement to the banking union. The debt crisis has made clear that sovereign bonds cannot be considered per se as being risk-free. In Greece, investors de facto faced two debt restructurings. Hence, to treat the bonds of different sovereigns differently in a regulatory respect should be a logical consequence. If you do not tackle this issue now, it will never happen. As regards your concern about market turbulences, it is obvious that banks would be granted a transition period for a gradual phasing-in. By the way, since cutting the bank-sovereign nexus will reduce the vulnerabilities of banks and sovereigns, the net effect on funding costs is not clear.