04 December 2013

ECB/Mersch: On the way to the European Banking Union - Using opportunities, controlling risks

Translated from the German

Speaking on the joint supervision and settlement of European banks, I want to focus on three points: 

1. On how the comprehensive balance sheet evaluation and stress tests can strengthen trust and why the ECB is not overstepping its authority;
2. On why savers will benefit from the Banking Union; and
3. On how the transferred competences are fully in line with the principle of subsidiarity.

1. In preparation for the joint supervision with which we begin formally in November next year, we have already initiated the comprehensive balance sheet analysis this November. First of all, we will carry out a risk analysis. We're currently in this phase, looking especially at liquidity and refinancing risks. In the first half of next year, the actual balance sheet assessment will follow. In that we will focus on the asset side of bank balance sheets from December 2013. We will then look more closely at randomly selected portfolios and individual assets. Complementing and building onto this risk analysis will be the audit testing and stress tests. These we are developing together with the European Banking Authority (EBA). They involve a forward-looking view of the banks' resistance capabilities under adverse conditions. Because of the enormous time pressure we are under, this will probably have to be based on the static balance sheets.

The exact details of this test are still to be decided internally. However it is already clear that the stress test will cover a three-year horizon and include two scenarios: a basis scenario, orientated on the European Commission’s spring economic forecasts, and a stress scenario that pits bank balance sheets against an imagined worsening of the economic environment. Probably, for the stress scenario, the so-called vulnerabilities will be envisaged as shocks, that then form part of the conventional macro-models. It hasn’t been decided yet how high the capital requirement for the stress scenario will be.

We will also have the support of external consultants. The fact that a neutral "third party" is included will significantly contribute to the credibility of the venture. 

Some might wonder whether the ECB is not assuming too many competences by taking over the joint supervision. To allocate banking supervision to the ECB was primarily a pragmatic decision: The legislature had sought a reasonable European solution. It was necessary to overcome the current regulatory culture in which national supervisors sometimes had an incentive to decide in the national interest, which was not always beneficial for the financial stability in other Member States or the euro area as a whole. Governments and market participants trust the ECB as an established, supranational institutiohat that they will supervise banks without bias and in the interest of Europe.

We have separate staff for monetary policy and supervision. The planning and execution of the supervision work is supported by a separate body, the Board of Directors. The Governing Council wll meet separately when it deals with regulatory issues.

2. I would like to mention just three reasons why a unified financial market architecture in the euro area is beneficial:

• First: Just as price stability in a monetary union pays no heed to national borders, so financial stability - or even instability - does not stop at national borders either. 
• Second, the Banking Union will aim at a single market for capital. The more capital flows within the euro area normalise, the more the interest on long-term government bonds normalise as well. These are considered a benchmark or anchor for interest rates on savings accounts.
• Third, for savers and taxpayers: once the Banking Union with its two main elements - joint supervision mechanism and joint resolution mechanism - has been established, taxpayers' money will be better protected and required less for bank bailouts than has been the case in the past.

3. If banks are operating across borders, it makes sense that they are also regulated by a supranational institution and, if necessary, resolved by it. Banks that are no longer viable should be able to exit the market in an orderly fashion. A resolution authority must therefore be able to make quick and impartial decisions. For this purpose, clear structures and lines of responsibility are necessary on the same level as the affected banks - at European level. The coordination of national resolution authorities has so far proved difficult - hence to rely solely on a loose network of national resolution institutions could end up in turf wars. This is why a single European authority is so important. Thus, the ECB will decide whether a bank is no longer viable or is likely to run into trouble. In such a case it would then hand over to the single resolution authority which will decide on a restructurisation or resolution strategy and work out the details.

The idea of ​​a common resolution fund is not without controversy. Many fear that low-risk, small and medium-sized banks will be liable for risky banks. However firstly, the Commission - according to the current proposal - would make sure that the fund can only be tapped if the same rules are observed as would be the case for national funding measures. According to the harmonised settlement rules, shareholders and creditors of the bank concerned are the first to pay and only when they have shouldered at least eight per cent of the liabilities, will the remaining resolution costs have to be funded in other ways.

Secondly, it is worth taking a look at the proposed financing of the fund. We are not behind a veil of ignorance but know that some banks have riskier business models than others. That is why what the banks will have to pay into the fund will be risk-weighted. I quote from the Commission's proposal for the single resolution mechanism: "This means that banks whose funding is almost exclusively based on deposits, will have to make very low contributions."

Full speech (in German)

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