yves mersch : the banking union – a european perspective : reasons, benefits and challenges of the banking union speech by mr yves mersch, member of the executive board of the european central bank, at the seminar “ auf dem weg zu mehr stabilitat – ein dialog uber die ausgestaltung der bankenunion zwischen wissenschaft und praxis ”, organised by europolis and wirtschaftswoche, berlin, 5 april 2013. * * * ladies and gentlemen, let me focus on three specific reasons for the establishment of a european banking union : first, delinking sovereigns and banks and fostering the reintegration of financial markets, second, avoiding national bias in supervision, and third, restoring the proper transmission of monetary policy. the importance of preventing sovereign problems from spreading to banks ( e. g. greece ) and preventing banking problems from spreading to sovereigns ( e. g. ireland, cyprus ) is a key lesson drawn from the crisis. actual or expected bank bail - outs by national governments increase borrowing costs for sovereigns, while also driving up banks ’ funding costs even further. this “ doom loop ” undermines national efforts to re - establish fiscal sustainability. moreover, growing pressures in funding and lending markets have led to a fragmentation of the euro area banking system along national lines. the funding costs of banks and the correlated borrowing costs for their respective sovereigns have increased, particularly in the peripheral economies. countries that lose market confidence become progressively dependent on domestic sources of funding, more prone to capital outflows and less responsive to monetary policy. the divergence in bank funding conditions at national level in turn gives rise to cross - country differences in lending conditions. lending conditions for households and firms in the periphery have become tighter than they should be given the prevailing monetary policy stance. this results in an inefficient allocation of funding across the euro area and hence has a negative impact on growth and employment. the establishment of a banking union would help to break this negative feedback loop between sovereigns and banks. a single supervisor with a truly european focus could rebuild depositor and investor confidence. a central supervisor will not be suspected of allowing banks to hide bad assets in some countries. neither would a european supervisor insist on national asset and liability matching, which increases fragmentation. a single resolution mechanism ( srm ) – the necessary complement of the single supervisory mechanism ( ssm ) – would avoid rising funding costs amid the risk of bank bail -

) or not, like cash. either option has implications for household behaviour. should dbm not be remunerated and the deposit facility rate be negative, as it is now, commercial banks may try to circumvent the regulations by setting up nonbank subsidiaries, which could in turn affect the efficacy of monetary policy. in any case, dbm would require significant safeguards to protect individuals from theft and from loss of personal information. in addition, any potential dbm solution needs be assessed against some high level principles, including : ( 1 ) technological safety, ( 2 ) efficiency, ( 3 ) technological neutrality and ( 4 ) freedom of choice for users of means of payments. the different options have potential impacts – both positive and negative – that need to be studied and considered carefully. only when the best way of designing dbm has been identified, can it be decided if dbm for non - banks should be introduced at all. the most important question for the ecb is whether introducing dbm would affect our ability to honour our mandate. adopting untried technology that ultimately proves unreliable could seriously endanger public trust in the currency and in the central bank. conclusions there are valid reasons for maintaining cash, from the perspective of commercial banks and central banks alike. given the widespread desire to use cash, banks should facilitate rather than obstruct customers in using their preferred method of payment. time will tell how the use of cash will evolve once instant payments are introduced in the near future. for central banks, cash is a tool to build trust. cash provides the general public with direct access to central bank money. for an independent institution like the ecb, maintaining that link is important, which is why we place great emphasis on ensuring people ’ s continued trust in cash. 3 / 3 bis central bankers'speeches