Peter Praet: We need to complete the Banking Union
Speech by Mr Peter Praet, Member of the Executive Board of the European Central Bank, at the
EUROFI Conference, Malta, 6 April 2017.
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The EU moved in less than five years 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. But 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:
First, private risk-sharing. 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. We do not want to
revert to the old world of implicit government guarantees for risky behaviour of financial
institutions. This 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 well-capitalised 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.