patrick honohan : banking union challenges opening statement by mr patrick honohan, governor of the central bank of ireland, to the joint oireachtas committee on eu affairs, dublin, 30 april 2013. * * * we thank the committee for the invitation to appear before it and contribute to its important work on the future of economic and monetary union. important because of the scale of the challenge to restore stability and create sustainable growth and jobs. important also because of the role of the committee in ensuring democratic participation and accountability on eu issues. the euro area has been battered by the fall - out from the great financial crisis that broke out in 2007. when the flood of financial globalisation receded, it exposed interrelated banking and fiscal and competitiveness weaknesses in many euro area countries. cross - border banking claims threatened to transmit weakness from stressed countries such as greece, portugal and ireland, to banks elsewhere in the monetary union. high indebtedness of some countries no longer seemed as easily supportable as had previously appeared. and even stronger countries experienced sizable banking losses. accelerated balance sheet repair associated with aggregate macroeconomic demand weakness has meant that recovery has been slow and tentative. this combination of pressures – primarily related to banking and wider financial sectors, as well as to macroeconomic and fiscal imbalances and divergences in competitiveness, has represented a significant challenge to the cohesion of the union. both borrowers and lenders became apprehensive and protective of their interests. at certain moments in 2011 – 12, the combination of problems seemed to market participants to threaten the very sustainability of the institutional arrangements supporting the common currency. while such fears have been allayed by the credibility of subsequent action, most notably the announcement of the outright monetary transactions ( omt ) programme of the ecb, the wider need to rebuild trust and strengthen the institutional architecture of the system is evident and confirmed in a general recognition that progress needs to be made on four dimensions, banking, fiscal, economic, and political, as adumbrated in the report of the four presidents ( of the european council, the european commission, the eurogroup and the ecb ) last june. i think it will be most appropriate for me to focus my remarks today chiefly on the banking pillar, i. e. banking union. we need banking union to transform the financial system from a source of risk and instability to a source of growth and support to the real economy. we have in fact made considerable progress in recent

is a target to reach agreement by the end of the irish presidency. linked to this is the need to get agreement on a common scheme of deposit guarantee funds throughout europe, also an objective of the presidency. however the combination of a european supervisor of banks with responsibility for the resolution of bank failures remaining at the national level may not be a stable equilibrium in political economy terms, as individual member state governments may question and resent the imposition from the ssm of bank resolution requirements potentially including recapitalisation costs. supervision and resolution should therefore be placed at the same level. the need for this has been acknowledged at successive european councils which affirmed that it is imperative to break the vicious circle between banks and sovereigns. now that there is agreement on a single supervisory mechanism it is especially important to press ahead with establishing a single resolution mechanism and authority and a single deposit guarantee scheme. bis central bankers ’ speeches