BoF/Noyer: Why the EMU needs a Banking Union

05 February 2014

Noyer stressed how crucial Banking Union was in order to strengthen the economic and monetary union. He said the version of the SRM agreed at the end of last year was not ideal, as it requires a long transition period which could fuel uncertainties.

One of the most important lessons from the crisis was that monetary union was insufficiently complete and coherent. The euro area crisis revealed a number of basic weaknesses:

• First, the problems encountered by some of the big banks severely damaged the fiscal stance in certain countries, where the state had to step in to save these banks. This, in turn, undermined market confidence in the sustainability of the resulting fast growing public debts, which led to sharp rises in the rates at which those countries could borrow on the market.
• Second, there was a perception that countries with impaired public finances would have difficulty bailing out their respective financial systems in the event of a problem.
• In response to these tensions, the European Central Bank took unprecedented steps to lower the cost of bank refinancing, cutting its key policy rates to historically low levels and providing unlimited three-year liquidity. But even this proved insufficient to calm market tensions. In some countries at least, monetary policy measures were simply not being fully transmitted to the real economy.

What was the reason behind these three phenomena, which were largely responsible for the escalation of the crisis in the euro area? It was the vicious circle that developed between the state of a country's banking sector and its perceived sovereign credit quality that emerged because of the lack of Banking Union.

The key to Banking Union can be summed up as follows: the aim is to find a way to ensure that banks in the euro area are considered precisely as that, as "euro area banks", and not as "Irish", "German" or "Italian" banks. In other words, the goal is to ensure that credit conditions in the euro area will not depend on where you are but on who  you are, which is what should be expected of an efficient financial market.

To achieve this, we need to have three things in place:

1. Federal bank supervision, to guarantee that all institutions are subject to the same rules and same methods of control. It is therefore more credible and strengthens stability and confidence in the area;
2. a unified mechanism for the resolution of banking crises;
3. a unified deposit-guarantee mechanism to avoid banking panics.

Over the past year, these ideas and words have translated into concrete actions. By November, the main banks in the euro area will be supervised by a federalised system headed in Frankfurt. A Supervisory Board will be established to plan and carry out the ECB's supervisory tasks, undertake preparatory work, and propose complete draft decisions for adoption by the ECB's Governing Council. Moreover, the entire European banking system will be supervised on the basis of a single set of principles - the Single Rulebook - which has been compiled by the European Banking Authority.

The move towards a Single Supervisory Mechanism (SSM) is firmly on track. Last October, we reached another important milestone with the announcement by the ECB that European banks will be subject to a Comprehensive Assessment prior to the set-up of the SSM in November 2014.

Indeed, in line with my colleagues at the ECB, I consider the Single Resolution Mechanism (SRM) to be another essential pillar of the Banking Union, alongside the SSM. Ideally, the SRM should consist of three main elements: a single system, a single authority and a single fund. The version of the SRM that has been agreed among European governments at the end of last year is not ideal, notably because it requires a long transition period which could fuel uncertainties. But what matters most is that we have clear and common set of rules concerning banks resolution. For the mechanism in itself, Europe has proven in the past that, confronted to acute crisis, it was able to accelerate the processes and deepen its solidarity.

Full speech

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