07 September 2012

Vítor Constâncio: Towards a European banking union

ECB VP Constâncio focused his lecture on the underlying reasons for the decision to set up a Single Supervisory Mechanism as a major step towards a European Banking Union that was taken at the European Summit in June 2012.

What is the meaning of a Banking Union? In Constâncio's view it involves a transfer to the European level of the regulatory and institutional framework responsible for safeguarding the robustness and stability of the banking sector.

The first pillar is regulation. It is already largely at the European Union level, particularly with the concept introduced by Tommaso Padoa-Schioppa of the “single rulebook” for the 27 Member States, which is based on the principle of maximum harmonisation coupled with a wider use of directly applicable regulations.

Accordingly, what is now at stake in forming a Banking Union goes much further. It implies also achieving a European dimension for the main components of the institutional framework for implementing, monitoring and enforcing regulation, both in normal times and in situations of stress. According to theory and historical experience, this includes: Bank Supervision, Bank Resolution and Bank Deposit Insurance. These are precisely the components of the Integrated Financial Framework that has been presented to the June European Council by President Van Rompuy in his Report “Towards a genuine Economic and Monetary Union”.

Vítor Constâncio clearly refers to providing a European dimension to the institutional framework and not to a centralisation of the competences pertaining to a Banking Union. Even a fully federal system implies, by nature, decentralisation of tasks between the federal and the lower levels. In Europe, subsidiarity and proportionality are key constitutional principles in the exercise of European competences, which are particularly crucial for a well-functioning Banking Union.

The June Euro Area Summit initiated the construction of a Banking Union with the agreement on the establishment of a Single Supervisory Mechanism, with the involvement of the ECB. The reference to the ECB and the statement that the Commission will “bring forward proposals under Article 127 (6) of the Treaty” mean that there is a direct link to EMU. As is well known, Article 127(6) provides that the Council by unanimous vote may “confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions.” Accordingly, the single supervision will refer mainly to the euro area as the ECB can only have binding powers in relation to the 17 members that have adopted the euro. The focus on EMU is appropriate for several reasons, which Vítor Constâncio elaborates in his remarks. However, this does not exclude possible mechanisms for other EU countries to be involved in the single supervisory mechanism, if so foreseen in the Council Regulation activating Article 127.6 of the Treaty. This could facilitate further financial integration in the single market as a whole.

The Statement of the June Euro Area Summit also makes clear that the single supervisory mechanism is directly related to the decision to grant the possibility of direct recapitalisation of banks by the European Stability Mechanism. This new and important step in the effort to de-link the vulnerabilities of sovereigns from euro area banks implies an allocation of supervisory functions to the European level. Therefore, European recapitalisation creates an immediate need for European banking supervision. Later in this lecture, Mr Constâncio argues why he thinks that there are very good reasons for the involvement of central banks in the supervision of banks. It is essential that both of these elements – recapitalisation and supervision on the European level - are implemented as expediently as possible.

Vítor Constâncio concludes that together, the various elements that integrate the concept of a Banking Union constitute a solid and consistent framework that will foster financial integration and be supportive of Economic and Monetary Union. They would overcome a shortcoming of the initial design of the monetary union that allowed financial supervision to lag behind monetary and financial integration. Their implementation will also contribute to address the current crisis by helping to separate banks from the sovereigns and reverse the ongoing fragmentation of markets along national borders. This in turn will help to restore the proper functioning of the monetary policy transmission mechanism. In particular, the new structure of the supervisory framework would reflect and complement the single market in financial services. He regards as normal that the ECB will be given, according to the European Summit decisions, a major role in the supervisory framework. It is with an acute sense of responsibility and awareness of the involved risks that he looks to the new competences about to be bestowed on the ECB, confident that ECB will continue to serve well the inspiring goals of our European Union.

Full lecture

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