carlos da silva costa : from banking union to financial union – overcoming current challenges address by mr carlos da silva costa, governor of the bank of portugal, at the seminar “ banking union : the new frontier of financial regulation in the european union ”, lisbon, 25 january 2016. * * * accompanying slides can be found on the bank of portugal ’ s website : slides ( pdf ). banking union – where do we stand? where we came from : from the single market to the banking union underlying the banking union are two steps that are almost causally linked. the economic and monetary union ( emu ) was established in 1999 in response to the need for exchange rate stability, to protect the orderly functioning and integrity of the single market. the establishment of a single currency and the adoption of a single monetary policy, managed by a european central bank, resulted from the practical impossibility of reconciling the free movement of capital with national monetary policies and exchange rate stability under the european monetary system. the european monetary system was incompatible with both the openness of economies within a single market and the existence of national monetary policies. indeed, even when monetary policies were aligned, the lack of confidence over this trilemma could give rise to exchange rate fluctuations. this inconsistency led to the 1992 – 93 exchange rate crisis, when the magnitude of fluctuations made it necessary to widen the fluctuation bands, which had a direct impact on intra - eu trade flows. following the onset of the international financial crisis in 2007 – 08, the limitations to the emu institutional framework became clear. the mechanisms in place – particularly, the stability and growth pact and the single monetary policy – were unable to prevent the build - up of major imbalances across the euro area countries. such imbalances resulted from excessive indebtedness of various institutional sectors in several countries and divergent developments in their competitive positions, amid particularly favourable market conditions, which did not properly reflect the sovereignty of national economic policies. the divergence in competitive positions was exacerbated most notably by : ( i ) the lack of both cooperation mechanisms to monitor wage developments under the emu and price - setting mechanisms against a background of low inflation rates, and ( ii ) some disregard for the buildup of external deficits in several countries, which could have been due to the lower severity of external account imbalances in economic unions at a later stage of integration. when these imbalances became apparent, the change in the

is a necessary but insufficient condition to ensure the existence of a single european financial system, efficiently channelling savings to investment opportunities within the european union territory. given that financing in europe is dominated by the banking system, it must be ensured that banks are granted the possibility of securitising their credits and placing those securities with institutional investors. on the one hand, this would allow european banks torelease funds to finance new investment and to have alternative sources of funding in the capital market ; on the other hand, insurers and pension funds, which currently invest in long - term securities issued outside europe, would have the opportunity to invest in european securities. the development of a european securitization market is hindered by the fragmentation of the fiscal and regulatory frameworks ( capital markets, insolvency, etc. ) prevailing in europe. although the harmonisation of national frameworks within a reasonable time frame is not realistic, it would be advantageous, in particular for smaller countries, to develop an opt - in european scheme that would make it possible to overcome the identified barriers. bis central bankers ’ speeches