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24 February 2014

BoG/Provopoulos: From financial crisis to financial stability - A European odyssey


Provopoulos spoke on the importance of Banking Union and the difficulties remaining in the SRF discussions. He argued that the euro area crisis has led to a strengthening of the monetary union in particular.

Addressing the fundamental weaknesses in the EU's architecture meant changes in the architecture include both improvements in macroeconomic surveillance and actions to establish a Banking Union. Economic governance has been improved through three main pillars: the so-called "six-pack", the fiscal compact, the "two-pack" and the European Systemic Risk Board that was established in 2011 to exercise macro-prudential oversight of the EU-wide financial system. However, the most ground-breaking reform of the EU's architecture as a result of the crisis has undoubtedly been the Banking Union.

In Greece, where the crisis was sovereign-induced, the subsequent rise in sovereign spreads severely challenged banks' capital adequacy. Greek banks' capital was effectively wiped out after the haircut on Greek bonds. Recapitalisation of banks was only possible through the introduction of the backstop of the Hellenic Financial Stability Fund, the resources of which were provided through official-sector loans to the Greek state. In other countries, where the crisis was bank-induced, the size of the banks often overwhelmed the fiscal capacity of the countries in which they were based. For these reasons, the creation of a Banking Union is of paramount importance to promote financial integration and to ensure financial stability...

The Single Supervisory Mechanism will become fully operational in November 2014. A necessary complement to a Single Supervisory Mechanism is a Single Resolution Framework to deal with non-viable banks and preserve financial stability. The Single Resolution Mechanism, and its associated funding through the Single Resolution Fund, outlines a framework establishing the procedure for dealing with banks that are considered non-viable. Resolution also needs to have a credible back-stop. Herein lies a significant challenge for the Greek Presidency. The European Council agreed a General Approach which will lead to an Intergovernmental Agreement, currently under negotiation. Under the General Approach, the Single Resolution Fund will be built up by contributions from banks over a maximum 10-year period. Should adequate funds not be available, the General Approach states that national authorities should be responsible. However, the continuation of national funding of resolution has a significant drawback. It implies that the negative-feedback loops which have been experienced between banks and sovereigns will remain.

Thus, the issue of whether common backstop arrangements will be in place, both for the transition period and in the steady state, is in question. In addition, I believe that the 10-year period should be shorter in order to minimise the period during which, effectively, a credible backstop will not exist. Even at the end of the 10 years, the resources of the fund could be depleted. In such a situation, it would be useful if the Single Resolution Fund were able to borrow from the markets or have access to funds from the European Stability Mechanism. However, the challenges do not end there. The European Parliament is taking a somewhat different approach. It envisages that it will play a greater role in decision-making procedures. It also has reservations about the clear nature of the backstop. In short, there is still some way to go to forging an agreement on all aspects of bank resolution in the Banking Union.

Finally, the harmonisation of Deposit Guarantee Schemes will help prevent the emigration of funds in search of better coverage. The scheme will begin operation in January 2016. Over time, however, it might be wise to revisit the issue of going beyond harmonisation to creating an EU-wide Fund, in order to further break links in the negative feedback loops that can develop between banks and the state.

Where do we stand?

Since the onset of the crisis, policymakers in the crisis countries have made significant progress in addressing fiscal and external imbalances. Financial market fragmentation is receding and the euro area banking sector is undergoing unprecedented adjustment, as evidenced in the case of the Greek banking sector. Banks have taken measures to consolidate and to increase efficiency. They are strengthening their capital basis. Market tensions have been receding, as evidenced by the narrowing of spreads in sovereign markets and improved access to bank credit. Recourse to Eurosystem lending operations has fallen sharply.

But the crisis in Europe has come at a large cost to the people of Europe, particularly those in the crisis countries. Nevertheless, by serving as a wake-up call, the euro area crisis has led to a strengthening of the monetary union, in particular, and the EU, in general. We are now emerging from that crisis. The lessons of the crisis will prove invaluable in the task of undertaking policies that will enhance growth, employment creation and financial stability.

Full speech


Greece's current account balance was in surplus by €1,244 billion in 2013 against a deficit of €4,615 billion the previous year, announced the Bank of Greece on 19 February 2014, a first since 1948. Since the beginning of data publication in 1948, Greece has only recorded deficits. This result "is due to a considerable reduction in the trade deficit by €2.4 billion as well as an increase in the surplus of transactions and services, particularly in tourism", the Bank indicated in its press release.



© BIS - Bank for International Settlements


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