Carlos da Silva Costa: Why we must complete banking union
financial stability threats would hit citizens' trust
Article by Mr Carlos da Silva Costa, Governor of the Bank of Portugal, in the 100th edition of the
OMFIF Bulletin, 21 January 2019.
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Following the 2008 crisis, reforms were needed in Europe's financial sector. The establishment
of the single rulebook and the launch of the European Union's banking union with its rules and
institutions constitute a commendable success in this regard.
The banking union is currently based on two pillars: the Single Supervisory Mechanism and
Single Resolution Mechanism. However, since these were put in place, the political will to
complete the banking union has waned.
The banking union is missing critical elements - a fully-fledged European deposit insurance
scheme, a backstop to the Single Resolution Fund and the provision of liquidity in bank resolution
- which jeopardises its fundamental benefits. As we progressed along the road, new and bigger
hurdles emerged. Policy-makers focused excessively on 'risk reduction v. risk sharing' and lost
sight of the banking union's overall objectives.
Incomplete setup
In this incomplete setup, banks are 'European in life but national in death'. Supervisory and
resolution decisions are mostly taken at the European level, but the ensuing consequences still
lie with taxpayers at the national level. This may have a potentially serious impact on national
budgets, as the ultimate guarantor of financial stability remains national.
In view of the mismatch between European oversight and national liability, the different
stakeholders' objectives and interests are unaligned. It is important to consider who is actually
looking after financial stability.
Four years after the SSM became operational, much has been accomplished. Danièle Nouy, the
former chair of the Supervisory Board (2014-18), must be praised for her decisive contribution to
this success. Her perseverance was essential to establish the mechanism's credibility.
As Andrea Enria takes over Nouy's mandate, now is a good opportunity to reflect on the many
achievements of Europe's crisis management set-up and draw some preliminary lessons from
the current (incomplete) architecture.
Looking ahead
With the benefit of hindsight, we should reflect on the need to strengthen the SSM's
decisionmaking process, the need to draw a line clearly between regulatory powers and supervisory
oversight, and ensuring the application of the principle of EU 'financial stability responsibility,
regulatory responsibility and supervisory responsibility'.
Strengthening the decision-making process of the SSM would ensure shared ownership of
problems and decisions, encouraging a broader vision on the implications of the SSM's
decisions on financial stability. This could be achieved through the establishment of intermediate
committees similar to those of the ECB's monetary policy function.
The separation of supervisory functions from regulatory ones is necessary for the political
legitimation of regulatory standards. The overlap of regulatory and supervisory territories
guarantees compliance with the principle of central responsibility for financial stability. In this
context, it is necessary to find ways to ensure and safeguard this basic principle within banking
union. It is also essential to determine which coordination and convergence mechanisms
between territorial regulatory and supervisory authorities can be established between the banking
union and the remaining EU member states.
One should not underestimate how much has been achieved in recent years. Nevertheless, the
foundations of Europe's financial architecture are still not sufficiently robust to withstand the
impact of a future crisis. This should be a priority for policy-makers and relevant institutions.
Decisive political will to move forward with the completion of the banking union is required. In the
absence of this will, Europe must revisit its existing rules to safeguard financial stability. This is in
the best interests of its people as few things can be more destructive to citizens' trust in
European institutions than threats to financial stability.