José Viñals, Financial Counsellor and Director of the IMF, spoke on financial stability and risks of fragmentation of the financial markets. At the same event, ECB VP Constâncio called for the resolution authority to decide on burden-sharing.
Financial stability has been a core concern of the IMF, exemplified by the fact that the IMF has been conducting financial stability assessments at the country-level since 1999, through the so-called FSAPs. It is clear that financial stability assessments at the individual country level are not sufficient for members of the European Union. Recognising this cross-border feature of their financial systems, the authorities in the European Union decided to build supranational bodies and frameworks to coordinate regulation and supervision at the level of the single market in financial services. So it made sense to conduct a financial stability assessment at the level of the European Union. And now that a Banking Union is in the offing, taking a cross-border perspective will become even more relevant.
The global financial crisis hit the Europeans at a time when the European institutional architecture to safeguard financial stability was still being built. Thus, the EU FSAP focused on the effectiveness of the EU institutions and the contributions of proposed EU-wide institutional reforms, including the Banking Union, to financial stability.
As suggested by the title of the book that we are publishing today, "From Fragmentation to Financial Integration in Europe", one of the key lessons from our EU-wide assessment is that robust supranational institutions are essential to ensure safe financial integration. When cross-border arrangements for regulation, supervision, and backstops are not robust, there will be a tendency to ring-fence behind national borders. This fragmentation is exactly what we have been observing since the outbreak of the crisis.
Policy actions at both the European and national levels succeeded in partially reversing the tide of financial fragmentation and promoting economic convergence. Recent policy actions have reduced tail risks and stabilised financial markets. OMT has been particularly effective in this context. Monetary policy has played and will have to continue to play a key role to support price stability and thus the recovery in Europe. Fiscal policy will need to remain anchored in a medium-term framework to ensure debt sustainability while taking into account cyclical conditions.
In addition, we need put the financial system on a totally sound footing. To accomplish this, at least three actions are essential:
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First, the clean-up of the banking system must be finished. Another credibility requirement is the availability of adequate capital backstops.
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The second urgent action in Europe’s financial system is the completion of the Banking Union. Effective supervision requires resolution frameworks that have teeth. The EC proposal for an SRM is a positive step. Strong independent powers are needed to resolve banks. While strengthening of national resolution frameworks should help, a common backstop would nonetheless need to be in place.
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Capital market-based financial integration needs to be promoted: Europe’s financial system remains dominated by banks. With banks so large, Europe must ensure that they are safe. It will be important that any gaps in intermediation get filled by more dynamic capital markets.
Full speech
Meanwhile, at the same event, ECB VP Vítor Constâncio said that the new eurozone resolution authority responsible for winding down failed banks must be able to make decisions on burden-sharing between countries when a bank is shuttered down. "It would be very important if there is an authority, they would be able to take decisions on burden-sharing of any resolution", he said. "If separate (national) funds imply budget-sharing has to be negotiated case-by-case, that is not a complete solution", he added.
The ECB vice president added that efforts to build a Banking Union in Europe through common banking supervision via the ECB and an authority to wind down or restructure failed banks should help restore credit growth. Already banks in the region are increasing capital and reducing the size of their balance sheets in preparation for the banking review and stress tests to be conducted by the ECB together with the European Banking Authority. Still these efforts have their limits, Mr Constâncio warned. One limit is that direct recapitalisation of European banks isn't going to happen, Mr Constâncio said.
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