Peter Praet: It is urgent to agree on an ambitious timetable for
completing the Banking Union
Contribution of Mr Peter Praet, Member of the Executive Board of the European Central Bank, for
the magazine of the Eurofi conference in Malta (5-7 April 2017), 4 April 2017.
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In less than half a decade, the EU moved from decentralized banking supervision and resolution
to the Single Supervisory Mechanism and the Single Resolution Mechanism, based on the Single
Rulebook. This is part of an overarching effort to create a sound institutional framework for
financial integration in Europe. There still are a number of legal, institutional and political
problems to overcome before a European bank can operate in the Banking Union as it operates
in its domestic market.
Several dimensions need to be taken into account in institutional design. First, private
risksharing. The financial system is a private risk sharing device, but we have learned the lessons
from the financial crisis in terms of budgetary costs, when excessive risk-taking by the private
sector was eventually borne by the public sector. Not to revert to the old world of implicit
government guarantees for risky behaviour of financial institutions entails making banks equally
liable across countries for the amount of risk they want to take into their respective balance
sheet. The general principle of the new European rules such as the Bank Recovery and
Resolution Directive is to absorb bank losses by bailing-in shareholders and uninsured creditors.
The new rules contain sufficient flexibility to deal with exceptional situations where public money
may be required to ensure financial stability. Second, public risk sharing. A certain level of public
risk sharing is necessary to create confidence in the overall financial system. Even
wellcapitalised banks can fall victim to runs and contagion. This is why central banks act as lender of
last resort and fiscal backstops should be in place to ensure trust in the stability of the financial
sector.
In the Banking Union, both supervisory responsibility and the fiscal backstop need to be at
European level, to underpin durably confidence in the area-wide financial system. Just as
necessary is the establishment of a European Deposit Insurance System (EDIS). The current
situation, where supervision is common, but the consequences of potential bank failures are still
predominantly national, should not last. In such an incomplete framework, national
considerations inevitably continue to affect supervisory decisions. This is not without
consequences for the incentives for banks to become more European. Concrete examples
include a lack of fungibility of liquidity or capital. The fact that the euro area is not considered as a
single jurisdiction may result in applying higher capital buffers to euro area G-SIBs.
While the institutional underpinnings of the Banking Union do not yet meet the requirements of a
genuine single financial market, the creation of the SSM has been a leap forward in the
establishment of a coherent regulatory framework. One of the first priorities of the Supervisory
Board has been to promote integration through harmonized implementation of Options and
National Discretions (ONDs), thereby evening the level playing field in the euro area. Regarding
liquidity requirements, the Single Supervisory Board can grant waivers at national as well as
cross-border level on a case-by-case basis. In the current institutional context, where the free
flow of liquidity within the same banking group but across border could be impeded, a prudent
supervisory approach has led the ECB's Supervisory Board to still maintain a floor on the liquidity
requirements of significant subsidiaries.
Overall, the banking landscape still resembles too much a collection of banking systems highly
exposed to their domestic economies, with limited cross-border private risk-sharing. At the same
time, one should recognise that the Banking Union is both an objective and a process of
fundamental structural changes in the euro area's financial architecture. The next steps are
clearly set out in the ECOFIN roadmap to complete the Banking Union. It is now urgent to agree
on an ambitious timetable for its implementation.