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At least for some time, the SSM and the Single Resolution Mechanism (SRM) will not encompass the whole European Union. Addressing the current segmentation of the Single Market will require more, a focused effort to restore the seamless operation of banks throughout the Single Market. In order to get an idea of the relevance of this task, let me remind you that out of the 43 large EU cross-border banking groups that are subject to the monitoring of the EBA, only five have business exclusively within the euro area. More than two thirds of the banking groups headquartered in the euro area have significant market shares in other Member States, and the same proportion of European groups headquartered in those Member States have significant business within the euro area.
We are still facing a risk that the repair of the Single Market will proceed with different speed and will be driven by different priorities within and outside the SSM jurisdiction. We cannot rule out the possibility that a rift opens up in the Single Market between Member States adhering to the SSM and SRM, and those that continue to rely on national tools for supervision and resolution. Only by maintaining an attentive focus on common rules (the Single Rulebook), common supervisory practices, strong mechanisms for supervisory cooperation and joint decisions, and especially, joined-up approaches to resolution, will we be able to contain the risk of a split two-tier system and restore the functioning of the Single Market as a whole.
The Single Rulebook
We are getting closer to the objective of a Single Rulebook in banking. I realise that having a big bang to a Single Rulebook could be very challenging and rather unrealistic, having in mind the complex institutional set-up of the EU. But we need to gradually develop mechanisms that identify the areas where the differences in rules are hampering the functioning of the Single Market and escalate the issue to the attention of the law makers. I believe the EBA could usefully play this role in banking legislation, through a wider recourse to our advisory role. But truly single rules are not sufficient to reverse the increasing compartmentalisation of the activities of cross-border groups in each Member State. Additional policy tools need to be activated to re-create an environment that supports the smooth conduct of cross-border business.
I would like to mention five areas in which we need to make progress going forward, if we are to truly re-establish a well-functioning Single Market: (i) convergence of supervisory practices; (ii) effective recovery and resolution plans; (iii) well functioning mediation; (iv) disclosure of truly comparable data; (v) good governance, i.e. ability to decide at the EU level when this is needed.
In all these areas important steps have already been taken, but I would point out that the institutional set up is still delivering half-baked solutions: we are moving in a European direction, but we are also maintaining so many safeguards for national authorities that the risk is that the effective functioning of the mechanisms developed for the Single Market will be impaired.
(i) Convergence of supervisory practices: the Single Supervisory Handbook
Let me start with the most daunting challenge, convergence in supervisory practices. A lot of progress has been made by the EBA. The simple fact that we are now moving to a single framework for supervisory reporting is a major step forward. The EBA stress test and recapitalisation exercise back in 2011 and 2012 led to true coordination of supervisory assessments and policy responses in the middle of the crisis. We are also working hard to address the perceived lack of consistency of Risk Weighted Assets (RWAs) calculated by EU banks through their internal models. We aim at identifying material differences in RWA outcomes, understanding the sources of such differences and formulating policy solutions to enhance convergence between banks and to improve disclosure.
(ii) Recovery and resolution plans
Credible recovery and resolution plans, commonly agreed by home and host authorities are an essential pre-condition to overcome the tendency towards a renationalisation of banking business. If authorities are convinced that in case of crisis there would be again recourse to un-coordinated national responses, the rational policy would be to take pre-emptive action in good times and ring fence the local establishments. On the contrary, if there is a reliable commitment to cooperative solutions, greater degrees of freedom could be left in developing cross-border business and reshuffling capital and liquidity within cross-border groups, according to agreed criteria.
(iii) Binding mediation
The scope for joint decisions in colleges of supervisors has been significantly expanded in the European legislation that has implemented the G20 reforms. Joint decisions have often been introduced together with binding mediation attributed to the EBA. This is extremely important, as we need to have effective mechanisms for dispute resolutions between home and host authorities, so as to ensure that we indeed achieve a single decision for the group as a whole, parent and subsidiaries, instead of multiple decisions for each establishment in case of disagreement.
(iv) Disclosure
The need to strengthen the framework for truly consistent disclosure of data by EU banks is an important feature for the proper functioning of the Single Market. Once the new system of fully harmonised regulatory reporting is in place, it would make sense to develop guidelines to ensure that a minimum set of key information, prepared according to common definitions, is regularly disclosed to market participants, so as to put them in a better position to understand the risk calculations performed by banks and the differences in results.
(v) Governance
Finally, let me touch a delicate and politically sensitive point: the governance for taking decisions at the EU level. I believe majority decision making has been a substantial improvement in the work of the EBA, as compared to the previous arrangements. I surely understand the rationale for modifying the rules for our governance following the introduction of the SSM: national authorities from Member States that will not immediately adhere to the SSM do not want to run the risk that decisions taken at the ECB table in Frankfurt are rolled out to their respective jurisdiction, without any possibility to have a say. In order to avoid a built in majority for supervisors from countries participating in the SSM, the EBA founding regulation has been changed, introducing the concept of double majority and requesting that the EBA Board strives to achieve consensus. Similarly, the governance for mediation has been changed, extending the number of national representatives in the mediation panel and ensuring a balanced representation of “ins” and “outs”.
These changes, although well justified, will increase the complexity of an already burdensome decision making process. In order to protect national interests, we risk not being able to decide at the European level when this is most needed.