peter praet : it is urgent to agree on an ambitious timetable for completing the banking union contribution of mr peter praet, member of the executive board of the european central bank, for the magazine of the eurofi conference in malta ( 5 - 7 april 2017 ), 4 april 2017. * * * in less than half a decade, the eu moved 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. 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 in institutional design. first, private risksharing. 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. not to revert to the old world of implicit government guarantees for risky behaviour of financial institutions 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 wellcapitalised 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

these include inadequate internal governance structures in banks, ineffective and costly debt recovery procedures in some member states and misaligned incentives that prevent a quick resolution of npls. to this end, the esrb has proposed 9 a series of measures to complement those already being taken at eu and euro area level. 10 in the short term, the esrb ’ s proposals focus on strengthening banks ’ npl management, including their prudent measurement and the valuation of the associated collateral. policymakers could aid this process by developing blueprints for asset management companies, accompanied by harmonised data templates across the eu. measures should also concentrate on insolvency regimes, debt recovery and servicing capacities with a view to improving recovery rates from npls. over a longer horizon, secondary markets ’ trading platforms should be further developed. and banks also need to be given adequate incentives, in particular in relation to accounting for impaired assets. from 1 january 2018 onwards, a new accounting standard for the classification and measurement of financial instruments, known as ifrs 911, becomes mandatory in eu. at the request of the european parliament, the esrb has recently published a report on the financial stability implications of ifrs 9, 12 which concludes that it is a major improvement, particularly regarding accounting for npls. the most important change introduced by ifrs 9 is the shift from an incurred loss approach to an expected credit loss approach for measuring impairment allowances. this means that banks will have to recognise impairments earlier, curtailing excessive forbearance towards npls and helping ensure that banking sector repair takes place in a timelier and more comprehensive manner in future downturns. a recent impact assessment, based on a sample of 54 banks across 20 member states published by the european banking authority, suggests that the introduction of ifrs 9 would lead to an increase of provisions of about 13 % on average. 13 the expected credit loss approach also means that banks will have to react in their accounting to new and forward - looking information as it is received. this means that impairment allowances may increase suddenly and significantly when economic conditions deteriorate, which could have certain pro - cyclical effects. 14 the esrb report considers a number of policies that could address such effects. for example, stress testing could be used as a means to gauge the variation in impairment allowances associated with adverse scenarios, in order to ensure that sufficient capital buffers are in place and to allow for remedial policy action if required. if banks can