sabine lautenschlager : the european banking sector – growing together and growing apart speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the single supervisory mechanism, at the lse german symposium, london, 2 march 2017. * * * two major events provide the frame for my speech today. both of them took place in june – one in 2012, the other in 2016. one of them took place in brussels, the other here in the united kingdom. one of them made europe grow together ; the other made europe grow apart. on 28 june 2012 in brussels, the leaders of the eu decided to take banking supervision to the european level and explore the idea of a fully fledged banking union. they took a decisive step towards a more united europe. on 23 june 2016, the people of this country voted to leave the european union. they took a decisive step away from a united europe. both events – while very different in nature – will fundamentally change europe. from the perspective of banks and their supervisors, both events have had and will have a huge impact. let us take a closer look. growing together – european banking supervision in june 2012, the euro area was a bad place to be – if you were an investor, a bank or a country that had lost the trust of the markets. on 1 june that year, the financial times wrote “ spain suffers €100 billion exodus ”. in the days thereafter, its front - page stories focused on ailing portuguese and spanish banks. in mid - june, its headline was “ fears rise over eu handling of debt crisis ”. by then the markets had driven the bond yields of some euro area countries to new heights. in other words, if the governments of those countries wanted to sell bonds to finance their debt they would have to pay much more. the media started speculating about a break - up of the euro area, as did some politicians. two weeks later though, something had obviously changed. on the last day of june, the financial times, on its front page, said “ markets rebound following eu deal ”. what had happened? what had happened was that an eu summit had taken place in brussels. there, the leaders of the eu agreed on a package of measures to stabilise the euro area. they decided on a €120 billion pact for growth ; they decided that the rescue funds, the european financial stability facility and the european

t the right medicine, for example, in the case of greece. praet : allow me to make a general point : institutional standards in many countries that faced challenges were particularly low. the world bank, and also the imf, issue some well - known rankings on good governance and solid institutions. these show that there is a clear correlation between the per capita gdp of a country and its position in such rankings. some countries rank very low in terms of all criteria related to good governance. competitiveness can be regained by making it cheaper to produce goods. however, so long as the business environment remains unchanged, the results will not be satisfactory. this problem was already touched upon in the first reform programmes. but too little importance was attached to the problem of governance standards. standard : earlier on, you talked about “ ownership ”. but this implies that a government which does not believe in reform measures shouldn ’ t implement them. praet : at the end of the 1970s, i worked as an economist for the imf. at that time, requests for aid from states, the so - called “ letter of intent ”, were pre - written by imf staff, but then sent by these countries to the imf as their own letters. even though the content was the outcome of discussions, that was, of course, somewhat strange. but the imf gave that money and imposed the conditions, so that was the understanding of “ ownership ” then. i believe that we have learnt from this. standard : but in the case of greece, this means that, no matter what the left - wing syriza government signs, it can ’ t work as long as they don ’ t believe in it themselves. praet : because of the ongoing negotiations, i won ’ t comment on greece. fundamentally, mutual trust and credibility are of critical importance in such situations. this means that when a country agrees to do something, it has to implement the agreement. the more credible a country is, the more patient creditors can be and the more trust they can show. that goes for all countries : if a government is trusted, it doesn ’ t mean so much if an agreed figure is not reached exactly in a year. the problem is that if you lose this confidence, the situation becomes messy and creditors then immediately press for results. standard : jean - claude trichet, the former president of the ecb, was an active letterwriter : he wrote a letter to ireland, threatening to