Pentti Hakkarainen: Welcome more common and integrated financial
markets
Opening remarks by Mr Pentti Hakkarainen, Deputy Governor of the Bank of Finland, at the
Nordic Capital Markets Forum seminar on European Banking Union, Helsinki, 5 October 2015.
* * *
Ladies and Gentlemen
Welcome to the Bank of Finland's Money Museum. It is a great pleasure for me to open and
participate in your seminar on the European Banking Union.
Without going into detailed argumentation, it is quite an indisputable view that fully integrated
financial system would bring invaluable benefits to the real economy in Europe. The banking
union is an essential part of the financial system. However, there are also capital markets and
payment services, clearing and settlement systems and other finance market functions, which
are elements for further integration. In these fields a lot of progress has been made in Europe
in recent years.
I would like to share with you some experiences of the Banking Union and then some views
on the new Action Plan of the Capital Markets Union.
Banking Union
The latest financial crisis made it very clear that interconnected banking and financial markets
require a better and stronger institutional framework that we had in Europe. New institutional
arrangements for bank supervision and resolution were needed to match the integrated
structures of banking business.
As a part of the economic and monetary union and as a remedy for future financial crisis, the
EU leaders agreed in June 2012 on creating the Banking Union. In the future, the Banking
Union will help us resolve banking problems while avoiding using taxpayers' money for
bailouts. The Banking Union also means a more stable financial system in Europe as the likelihood
of problems is reduced.
The Single Rulebook provided the foundation for the Banking Union. It is based on the idea of
harmonised regulatory requirements, such as capital adequacy rules for banks and
supervisory practices.
Single Supervisory Mechanism (SSM)
One of the main pillars of the Banking Union is the Single Supervisory Mechanism (SSM). It
ensures consistent, non-biased supervision in all Member States. The Single Supervisory
Mechanism started supervision nearly one year ago and its work is independent and separated
from the ECB's central banking activities.
From the banks' perspective, the introduction of the SSM means numerous changes. I will
mention only a few of them.
For cross-border banks, operating in multiple countries within the Banking Union, the SSM
effectively simplifies their contacts with the authorities. A bank will work with a single supervisor
and operate following a single rulebook. This implies also lower costs for the bank in complying
with regulatory requirements.
Common rules and methods of supervision have a broader impact on competition among
banks. Banks are treated equally in supervision and regulatory capture can be avoided,
thereby ensuring a level playing field.
The Single Resolution Mechanism (SRM)
The second important pillar of the Banking Union is the Single Resolution Mechanism (SRM),
which is a necessary complement to the Single Supervisory Mechanism. Single Resolution
Mechanism creates a single authority, which is responsible for swift and orderly resolution of
banks in the euro area and participating member states.
The SRM is a game-changer in the European bank resolution, as it is designed to end bank
bail-outs. The new bank recovery and resolution framework ensures a uniform European
approach where identical cases are treated identically.
The Single Resolution Mechanism is complemented by the Single Resolution Fund (SRF)
which is financed via levies on the banking sector itself. The Fund (EUR 55 bn) starts from
national compartments but it will gradually, in eight years, be mutualised to become a single
European Fund.
Underlying the new regime is the Bank Recovery and Resolution Directive (BRRD) which
changes the culture in the banking markets. Bail-in will now be the rule, bail-out a rare
exception. As of the beginning of 2016, the BRRD requires bail-in of shareholders and creditors
equal to at least 8 % of the total liabilities of a failing bank. Only after the threshold of 8 %
bailin can money from the resolution fund be used and only at the very end of the process can
public money be used. It is notable that public money can only be used to facilitate resolution,
not to save non-viable banks.
Macroprudential policy
Alongside the changes in microprudential supervision due to the establishment of the SSM
also a macroprudential policy is becoming effective.
While the macroprudential policy lies in the first place with the national authorities, the SSM
Regulation assigns macroprudential tasks also to the ECB. In particular, the ECB may decide
stricter measures than national authorities, using the counter-cyclical buffer or other
macroprudential tools provided with the European legislation. The role of the ECB in making
macroprudential decisions within the Banking Union can be seen as a useful complement to
national frameworks so as to avoid the so called inaction bias in macroprudential policy.
Deposit Guarantee System
A common Deposit Guarantee Scheme can be seen as a completion of the Banking Union.
The planning of such a scheme is still in a very early phase and would require harmonisation
of the national schemes as a first step. The European Commission is mandated to revisit the
issue in 2019. But I assume that the European wide deposit guarantee system will be promoted
earlier than 2019 since it would fit naturally inwith the SSM and the SRM.
A Capital Market Union for Europe
Following the initiation of the European Banking Union, Commission President Juncker
promised in July 2014 to create a European "Capital Markets Union". As he explained it, "To
improve the financing of our economy, we should further develop and integrate capital markets.
This would cut the costs of raising capital, notable SMEs, and help reduce corporations' high
dependence on bank funding".
Last week, The European Commission launched the Action Plan on Building a Capital Markets
Union (CMU). The Capital Markets Union is a good initiative. The ECB and the Bank of England
have already been active in some capital markets issues, especially reviving the EU market
for a high-quality securitization. The CMU should help mobilise more capital in Europe and
especially channel it to financing of the corporate sector. By opening up a wider range of
funding sources for investments the CMU can reduce the bank-dependency of European
finance and thus the vulnerability of the EU economies and corporations to banking shocks.
The CMU can also deepen financial integration and increase competition in the EU financial
markets.
Conclusions: some enhancements
Ladies and Gentlemen!
To conclude, I would like to express some additional views on the Banking Union and the
Capital Markets Union, as I think that some enhancements would be needed.
The Capital Markets Union needs robust banks. The Banking Union was a major step in the
right direction. The BU is mandatory for the euro area countries, while the other member states
can join the BU on a voluntary basis. It is important to strive for an as unified approach to bank
supervision as possible in the whole EU and including also the EEA countries and others. This
is so because banks are and will be of high importance for the SME financing, and the future
playing field may not become quite level in the SME financing in the future Capital Markets
Union without some extra efforts.
Moreover, for ensuring financial stability and capital market integration, the
bank-sovereignnexus has to be in the future. The bank-sovereign-nexus is a two-sided problem. The nexus
from banks to sovereigns is dampened through the introduction of the SRM and the Bank
Restructuring and Resolution Directive. However, the dampening of sovereign risks to banks
has not been resolved yet. Up to now there have been some discussions about potential
risksensitive capital requirements regulation for sovereign bonds. That is s one way forward, but I
would also support the five Presidents' initiative to review the treatment of bank exposures to
sovereign debt, for example by setting large exposures limits1.
As I said in the beginning, well functioning integrated financial markets are invaluable for the
real economy and there is a lot of preparation underway. As you all here present are in
important, key positions in financial markets, I call for your active participation in and providing
your valuable contribution to these consultations. With your input we can improve our work in
creating deeper, more liquid, better integrated and increasingly safe capital markets.
Thank you for your attention!
BIS central bankers' speeches
BIS central bankers' speeches