sabine lautenschlager : from supervision to resolution – a german perspective speech by ms sabine lautenschlager deputy president of the deutsche bundesbank, at the institute of international and european affairs, dublin, 25 june 2013. * 1. * * introduction dear mr halligan, ladies and gentlemen i would like to thank you very much for your invitation. it has been my pleasure to come to dublin to discuss with you those new developments relating to the banking union which are of such great importance to europe. the title of my remarks refers to the “ german perspective ”. i would like to talk with you about my vision, and that of the deutsche bundesbank. and – i will make no secret of it – i have a case to put before you today. one of james joyce ’ s most famous literary characters, stephen dedalus, once observed that errors were the portal of discovery. having failed to prevent the crisis in the first place, policy makers and supervisors alike are at least rightly being called on to learn the right lessons. one of these lessons is the banking union, which was launched in june 2012. the eurozone summit resolved, amongst other things, to transfer banking supervision to the ecb. further elements were added in december 2012. these include the single supervisory mechanism ( ssm ) and the single resolution mechanism ( srm ) here in the euro area. a single european deposit insurance scheme is also being discussed. adding a single resolution mechanism to a single supervisory mechanism is, in my opinion, not just a good idea, but one whose time has come. control and liability should go hand in hand. but a european resolution mechanism likewise needs harmonised standards and instruments, which are currently being developed with the eu ’ s bank recovery and resolution directive ( brrd ). if i may say so here : the irish presidency has distinguished itself admirably during these difficult negotiations. the third pillar of a banking union – a european deposit insurance scheme – is currently not regarded as a priority task. i concur with this view. after all, a deposit insurance scheme is a promise by a government to its depositors to indemnify them to a certain degree in the event of a crisis. a joint deposit insurance scheme would thus necessarily mean joint liability of the member states ’ taxpayers. however, joint liability in this area requires joint european control in economic and fiscal policy. and we are nowhere near that stage yet. however, there are more conditions to

notion that the eurosystem could also make a contribution, for instance, by providing bridge loans. i don ’ t think that ’ s a good idea. true, a central bank can provide emergency liquidity – but only if a bank is suffering from temporary liquidity shortages. however, it may not, and should not, contribute aid towards resolution or restructuring, as this can easily cross the line into fiscal policy. as a last resort, however, the fund could request public financial assistance for example, from the esm, as there could be threats which, in extraordinary cases, could require recourse to public funding. 5. direct recapitalisation through the esm public funds is a buzzword and a hot - button issue, one that is inseparably linked to the question : who is the public that is supposed to be doing the funding? should nation - states be called to pay up whenever a crisis occurs, or should there be a joint european fund? i see no compelling reasons why the costs of bank restructuring should be shifted entirely to the european level. you see : the weal and woe of a bank depends not only on the competence of its management but also on external factors : the quality of supervision ; the financial and economic strength of its borrowers, which in turn hinges on a nation ’ s economic policy ; and also the fiscal policy of the country where a bank is based. ample proof of this assertion is bis central bankers ’ speeches provided by the fact that a bank ’ s funding costs are dependent on the sovereign credit rating of its home country. although we will be centralising supervision in europe next year, other factors such as economic and fiscal policy will remain largely the responsibility of individual nations. and, as long as that is the case, the arguments for shifting losses completely to the european level do not appear to be compelling. the balance sheet assessment provided for by article 27 of the ssm regulation also acquires major significance in this context : this article requires the ecb to assess the portfolio quality of the banks it will be supervising in future. what the regulation does not say, however, is what happens if hidden losses are disclosed. i have two things to say about this. i consider the balance sheet assessment to be very important. for it to be successful, we should base our assessments of banks ’ balance sheets not only on supervisors ’ judgements. we should also enlist outside specialists – external auditors – for a quantitative assessment. not only