Mario Draghi: One year of ECB banking supervision
Speech by Mr Mario Draghi, President of the European Central Bank, at the ECB Forum on
Banking Supervision, Frankfurt am Main, 4 November 2015.
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Ladies and gentlemen,
Back in 2012, when it was decided to establish a single supervisory mechanism (SSM),
many a critic claimed that either it was impossible, or that it would take forever. And yet here
we are, marking the first anniversary of the SSM with this conference, reflecting no longer so
much on the structure of supervision, but on its content.
Now, the critics tell us that other necessary improvements to the institutional architecture of
the euro area, and of the EU, are either impossible, or will not happen during our lifetime.
You will forgive me for not being convinced.
The establishment of the SSM was neither the start, nor the end of the suite of institutional
reforms that we must undertake to restore in Europe the stability that is the premise for a
return to prosperity. But it was a crucial step and in many ways it was the key to going
further.
Let me put the SSM's significance in a broader perspective:
In the early years of the euro, we lived under the illusion that we had established a
fullfledged monetary union. There can, however, only be a single money if there is a single
banking system. For money to be truly one, it has to be truly fungible independent of its form
and independent of its location. In particular, deposits, which are the most widespread form
of money, have to inspire the same level of confidence wherever they are located.
To ensure that deposits are truly as safe everywhere across the euro area, the likelihood that
a bank fails has to be independent of the jurisdiction where it is established. Resolution has
to follow the same process in the event that a bank fails. And, when push comes to shove,
depositors must be afforded similar protection wherever they are located.
Fundamentally, this was and remains the agenda of Banking Union. And it is why Banking
Union was conceived with three pillars: a single supervisory mechanism, a single resolution
mechanism, and a uniform deposit insurance scheme, which remains to be specified. For
money to be truly one, we need all three. Supervision had to come first, not because it was
the easiest to establish, but because it was the necessary condition to proceed with the other
pillars of Banking Union.
That the SSM was established at the ECB owes much to circumstances. There are benefits
in the current set-up, but that was not of vital importance. What was of absolutely vital
importance, however, is that the SSM was established. In a fiat money system with fractional
reserves, sound and uniform supervision is essential to there being a sound and single
money.
It is now high time that these other aspects of banking union are also completed. Otherwise,
we would make the same mistake that was made when the euro was introduced. Back then
the consequences of having a single currency were not fully reflected in the Union's
institutional design. Internal inconsistencies made our union much more vulnerable than it
needed to be when an external shock hit it.
If the SSM is of great importance to the singleness of money, it is also greatly important to
the singleness of the market. The single market is, as the euro, a central and irrevocable
creation of the European Union. But, as is the case for the euro, its irrevocability, to remain
unquestionable, needs being buttressed by appropriate and credible institutions.
The SSM is one such institution. And that is why it was - and remains - open to participation
by countries which are not in the euro area.
Before the crisis, the free passporting of banking services across borders relied on the
principle of home supervision, host recognition. This principle, however, requires equal
standards of supervision across borders, and mutual trust in the quality of supervision. That
trust did not always stand the test of the crisis. A single supervisor, applying homogenous
methodology across institutions, internalises mutual trust. Its establishment was thus one
answer, and certainly an effective answer to this challenge. A single supervisor builds trust
not only between supervisors, but also with shareholders and other stakeholders, including
the fiscal authorities that, in the past, were too often assumed to be the shareholders of last
resort of their national financial system.
The importance of the SSM to uphold the single market serves as a reminder that the
objective of having a robust supervisor is not just to make banks safe. The objective is to
make banks safe so that they can safely access resources and use them to fund innovation,
investment, and growth. Similarly, creating a single supervisor was not an objective per se.
But it was necessary so that the integrity of the single banking market is not questioned.
What I have said of banking can be extrapolated to other areas of finance, which is one
reason why, alongside Banking Union, the Capital Markets Union, championed by
Commissioner Hill, also needs to be implemented fully and as quickly as practical.
I am not saying "as quickly as practical" for no reason. If we want to restore in Europe the
stability that is the premise for a return to prosperity, we need to consider the economic costs
entailed by recurrent uncertainty over the operating environment of European firms. Not only
does it cause a loss of growth today, but by impeding investment, it may also weaken our
potential in a more lasting way. Increasing the horizon of visibility is desirable generally, but it
is true that an apparently never ending train of reform is not greatly conducive to reducing
uncertainty.
There is a simple solution to that: specify what we want to change, clarify the calendar to do
it, and then just do it. This is exactly how the SSM was established. And that is perhaps the
last area of significance of the SSM that I have not yet mentioned: it is the yardstick against
which we can now judge other achievements.