peter praet : towards banking union remarks by mr peter praet, member of the executive board of the european central bank, in the session " ( do not ) break it : today's europe at full speed " of the luiss international conference on " europe 2017 : make it or break it ", rome, 24 january 2017. * * * i would like to thank sander tordoir and malte jahning for their contributions to this speech. today ’ s conference title ‘ europe 2017 : make it or break it ’ brings forth the notion that europe is at a crossroads. it reflects an increasing polarization between the proponents and the detractors of european integration. polarization does not do justice to the policy responses and the institutional reforms that have strengthened our economic and monetary union in the aftermath of the crisis. today i would like to do justice to the significant progress towards banking union. in less than half a decade, the european union moved from decentralized banking supervision and resolution to the single supervisory mechanism and the single resolution mechanism. the fact that more needs to be done to complete the banking union should not come as a surprise. the concept of banking union is simple a european bank should be able to operate in the banking union exactly as it operates in its domestic market, but its implementation is complex. this entails fungibility of capital and liquidity, simplified governance structures, and lower operational costs. the institutional framework should create an environment fostering a more geographically diverse, more resilient banking system. there still are a number of legal, institutional, political and even cultural problems to overcome before we can declare this ambitious undertaking achieved. the direction of progress is clear, its speed less so. banking union is not an end in itself, but a backbone of the single currency. first, for money to be truly single within a currency area there has to be full substitutability between its different forms, including full fungibility of deposits across border. second, risk sharing channels are particularly important for countries in a monetary union, because the single monetary policy cannot cater to cushion asymmetric shocks. the financial system is a central channel of adjustment. in a mature monetary union like the united states, empirical evidence suggests that the bulk of shocks to individual states are smoothed through the financial system1 and that the contribution of the federal budget to income smoothing is comparatively small. the financing of the economy has traditionally been market - based in the united states, and bank

runs of unprecedented speed and scale, magnifying the effects of such a crisis. banks might manage to render their deposits more attractive than central bank ones. they could, for instance, provide additional services to those offered by central banks. such services could include paying bills, or cross - selling financial insurance products. otherwise – even in the absence of a crisis – a readily convertible cbdc could crowd out bank deposits, leading to the disintermediation of the banking sector. this could have far - reaching implications for the structure of the financial system and for the ability of central banks to perform their core tasks and ensure that their monetary policy is transmitted to the real economy. if the central bank were to take retail deposits, it might also have to provide loans, with all the ensuing consequences. the central bank would need to launch customer - facing business lines. deposit and lending facilities would also require the central bank to take on the burden of regulatory compliance in areas such as anti - money laundering, consumer protection and confidentiality. some argue that this may reinforce monetary sovereignty, as disintermediation would make the financial system safer and reduce the moral hazard of banks by diminishing their role in money creation. 5 but disintermediation would be economically inefficient and legally untenable. the eu treaty provides for the ecb to operate in an open market economy, essentially reflecting a policy choice in favour of decentralised market decisions on the optimal allocation of resources. historical cases of economy - wide resource allocation by central banks are hardly models of efficiency or good service. furthermore, a retail cbdc would create a disproportionate concentration of power in the central bank. these potentially highly adverse effects on the financial system would appear to outweigh the benefits envisaged by the introduction of a retail cbdc. what, then, could be done to mitigate the impact of a cbdc on the financial system? one option could be to remunerate cbdc at below - market rates in order to create incentives for non - banks to rely more on market - based alternatives rather than on central bank deposits. the drawback would be that, in times of crisis, it may become necessary to apply highly negative rates, which could generate criticism from the public and substantially undermine public confidence in the central bank as well as in the basic values of saving which underlie our societies. another option is a tiered remuneration system. 6 in line with