22 November 2013

ECB/Draghi: Opening speech at the European Banking Congress "The future of Europe"

The ECB’s comprehensive assessment/SSM

It is clear that there needs to be much more confidence in banks within and across countries that are joining the SSM. This is the objective of the ECB’s comprehensive assessment... There should be no doubt about the credibility and rigour of the assessment, or the comparability of the results. Let me add here that, by end-January, we expect to announce the key parameters of the stress test exercise together with the European Banking Authority (EBA).

We have recently been meeting with bank top management along with their national supervisors. We have emphasised in these meetings that to make the exercise a success we need to have high-quality information. In fact our first data request, called the “portfolio selection”, has just been issued.

We are aware that gathering this information requires an extraordinary effort for national supervisors and especially for banks. But it is important to note that this is not a permanent or recurrent feature of the SSM.

Since last year, banks have been improving the robustness of their balance sheets by increasing capital and provisions. In this sense, the exercise is already producing results – and I encourage banks to continue. Given the improvement in market conditions, market-based solutions should be more feasible than in the recent past.

If private sector solutions cannot be achieved in a timely and realistic manner, there is also a responsibility for the public sector. To ensure the credibility of the exercise, we need clear public backstops at the national and European levels. If they are drawn upon, the Commission has clarified that the state aid rules will provide for a level playing-field in terms of burden sharing, while financial stability will be fully safeguarded...

Fostering financial integration

Once the SSM is established, it offers a real possibility to take a new, European approach towards governance of the financial sector – and hence to reverse the harmful financial fragmentation we have seen during the crisis.

There are three ways in which I see that the SSM can help.

First, the SSM can supervise in the European interest. As European supervisor it has no incentives related to national champions and its mandate is fully aligned with its European financial stability objective. The fact that the new European supervisor is not only legally independent but also independent of any single government or national financial system facilitates the pursuit of its objective.

Second, the SSM can increase confidence among supervisors. During the crisis, some supervisors, motivated by uncertainty, engaged in defensive actions such as national ring-fencing of liquidity and national asset-liability matching. This may have been rational given their mandates, but it reinforced fragmentation. Under the SSM, all supervisors will have the same rules, standards and decision-making procedures. As such, a supervisory assessment from the SSM that a bank is healthy will be a “seal of quality” that is valid from one country to the next.

Third, the SSM can foster trust between banks. European supervision should make banks more confident to lend to one another across borders, in particular in the interbank market. And it could also make banks more willing to engage in cross-border mergers and acquisitions. This would deepen financial integration and make the euro area more resilient to fragmentation.

Our long-term vision for the SSM involves an environment where a creditworthy firm or household can get a loan from any bank in Europe at comparable conditions – and where location considerations would not be predominant. Yet, further improvements will be needed in other domains. It is not only different supervision that holds back cross-border banking integration and activity. Also different national legal frameworks, different tax regimes and different rules for corporate governance contribute to fragmentation. These issues warrant consideration to facilitate financial reintegration.

The Single Resolution Mechanism as an essential complement

The key to an effective resolution regime is [one] that creates legal certainty, consistency and predictability, thus helping to avoid ad hoc solutions. To this end, there are two points where I think more certainty is needed.

First, while the new EU resolution framework provides the appropriate resolution toolbox, it would be better to have it available right from the start of the SRM. I therefore support implementing the bail-in tool well before 2018.

Second, to price risk properly, investors need to see a clear pecking order in resolution financing – running from capital write-downs and bail-in to use of a bank-financed single resolution fund. However, it would be difficult to make such a pecking order credible without a public backstop for the single resolution fund for exceptional cases where its resources are exhausted. Otherwise, investors may suspect that governments would at some point be forced to step in again.

Such a backstop would still result in the private sector paying as any borrowing by the fund would have to be repaid, if needed through ex post levies on the banking sector. In other words, the future system would not be about bail-outs or mutualisation – it would be fiscally neutral; the taxpayer would not pay.

Conclusions

I have discussed today the benefits of a European perspective to our current challenges. This is not the perspective of idealists. Rather, in a closely integrated monetary union, it is the perspective of realists.

A European perspective is firmly enshrined in monetary policy. And it is equally enshrined in our approach for establishing the SSM. We will overcome fragmentation to create a truly integrated financial market. There is still much more to be done to overcome the challenges that we face, but we have the right orientation.

Full speech

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