peter praet : we need to complete the banking union speech by mr peter praet, member of the executive board of the european central bank, at the eurofi conference, malta, 6 april 2017. * * * the eu moved in less than five years from decentralized banking supervision and resolution to the single supervisory mechanism and the single resolution mechanism, based on the single rulebook. this is part of an overarching effort to create a sound institutional framework for financial integration in europe. but there still are a number of legal, institutional and political problems to overcome before a european bank can operate in the banking union as it operates in its domestic market. several dimensions need to be taken into account : first, private risk - sharing. the financial system is a private risk sharing device, but we have learned the lessons from the financial crisis in terms of budgetary costs, when excessive risk - taking by the private sector was eventually borne by the public sector. we do not want to revert to the old world of implicit government guarantees for risky behaviour of financial institutions. this entails making banks equally liable across countries for the amount of risk they want to take into their respective balance sheet. the general principle of the new european rules such as the bank recovery and resolution directive is to absorb bank losses by bailing - in shareholders and uninsured creditors. the new rules contain sufficient flexibility to deal with exceptional situations where public money may be required to ensure financial stability. second, public risk sharing. a certain level of public risk sharing is necessary to create confidence in the overall financial system. even well - capitalised banks can fall victim to runs and contagion. this is why central banks act as lender of last resort and fiscal backstops should be in place to ensure trust in the stability of the financial sector. in the banking union, both supervisory responsibility and the fiscal backstop need to be at european level, to underpin durably confidence in the area - wide financial system. just as necessary is the establishment of a european deposit insurance system ( edis ). the current situation, where supervision is common, but the consequences of potential bank failures are still predominantly national, should not last. in such an incomplete framework, national considerations inevitably continue to affect supervisory decisions. this is not without consequences for the incentives for banks to become more european. concrete examples include a lack of fungibility of liquidity or capital. the fact that the euro area is not considered as a single jurisdiction

the commission and authorities to verify that further convincing and concrete consolidation and reform strategies are prepared and implemented. the greek authorities have started to implement the ambitious economic and financial programme that was agreed with international monetary fund and the european commission, in liaison with the ecb. this programme itself is an important achievement. it is based on prudent macroeconomic assumptions. it is frontloaded. it has the potential to correct long - standing flaws, because it entails a very comprehensive structural reform package. this structural reform package to my surprise seems still largely unknown to many. the three institutions will regularly come to athens to monitor the programme and support the government in its efforts to implement the measures, so as to secure a better future for the greek people. we consider that the greek programme has the appropriate features to succeed. many policy adjustments that seemed herculean at the start have succeeded in history. and we have indications that the budget execution in greece in the first five months of 2010 – despite a painful recession – is on track. the central government cash deficit is more than 40 % below the level over the same period last year. we see encouraging signs in other countries too. measures are being prepared to credibly advance fiscal consolidation. those measures are particularly helpful if they focus strongly on the expenditure side, because such measures have in the past proven more effective, and if they address one prime cause of a loss of competitiveness in recent years : the rise of public salaries relative to the rest of the economy. the view that fiscal consolidation is generally negative for growth is too narrow. demandside economics has in the past underestimated the risks of excessive spending, and is now overestimating the risks of consolidation. we have to take into account that today ’ s adjustments are being made in strict association with structural reforms and they enhance confidence. both elements will increase supply and, along with supply potential, prospective incomes and thus demand. these adjustments are therefore ultimately growth - friendly. there are very important decisions under way. it is true that europe ’ s decision - making process is complex. this is because it involves both national and supranational actions. but complexity does not mean ineffectiveness. europe has been remarkably effective during the 2007 / 2008 financial crisis. not a single systemically important institution has failed, not a single recovery programme has been refused by any parliament. what markets often underestimate is europe ’ s complete dedication to the degree of integration achieved so far. decisions were taken recently, which