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24 September 2013

ECB/Mersch: Recent policy decisions regarding the Banking Union

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Mersch elaborated on the recent policy decisions regarding the development of the Banking Union and their impact on the ECB as a supervisory authority.

Translated from the German

The European Parliament has approved the draft proposal for a common banking supervision. I am assuming that the Council will give its formal approval shortly. The aim of the proposed Banking Union is to create a completely integrated, efficient and stable European financial market. Its core is an integrated banking sector, which will intensify the competition for capital. This means that capital is allocated more efficiently. This means that companies have the necessary room for investments which then can have a positive effect on economic growth.

For us as a central bank, an integrated banking sector means in particular that our monetary policy can work effectively throughout the whole euro area. And only then can it have a significant impact on the real economy. Particularly in Europe, a fundamental reorganisation of the banking sector is enormously important as it is responsible for about 80 per cent of corporate financing. Europe needs a healthy banking sector that can supply businesses and households with the loans they need.

Of course, banks have to bring their own balance sheets in order. But a real European Banking Union, with uniform and binding rules that are verifiable by third parties and a rigid balance sheet analysis, can contribute to restoring confidence in the sector:

  • First, the single supervision will provide more transparency.
  • Second, the Banking Union will create equal conditions for all banks in the euro area.
  • Third, an improved, uniform resolution framework will contribute to the recovery of the system.

1. Transparency

Attention is currently focused mainly on the comprehensive balance sheet evaluation of those banks that fall under the direct supervision of the ECB. As the name suggests, this is more than just a stress test. We will first conduct a risk analysis and a thorough and intensive review of the assets. The results of this inventory are then incorporated in a third stage in a stress test that the European Banking Authority (EBA) will carry out in close cooperation with us. The result of this comprehensive survey should be a single database-specific code. As an independent, supranational European authority, the common banking supervision is free from national bias. The ECB's established European perspective provides the necessary credibility to the European banking system.

In order to strengthen the trust of investors in the sector, we now have to consider how we will deal with potential weaknesses that might by revealed by this inventory. A credible and solid insurance mechanism has to be established before the start of the review. Without such insurance, we can not perform the financial statement analysis. In principle, banks should recapitalise on the market. If this is not possible in individual cases, a safety net is required - but this has to happen first at Member State level - the Banking Union is not a transfer union through the back door.

2. Same conditions

To collect data consistently in a supervisory context shows what it means when we speak of uniform prudential rules and fair conditions for all banks. Our balance sheet test will be based on uniform definitions by the EBA. For empirical research, it is essential that data is not only collected according to the same specifications, but that all parties involved have the same understanding of what these specifications mean.

Even though the ECB will oversee only the major banks in the euro area directly, this does not mean that the other banks will fall through the European supervisory system. Firstly, the ECB oversees the national supervisory authorities. Secondly we can, if considered necessary, take over at any time the direct supervision of smaller institutions. Future supervisors will therefore no longer be able to turn a blind eye to their national institutions.

3. Single resolution mechanism (SRM)

If banks are no longer financially viable, they must also be able to withdraw from the market without pulling the rest of the financial system into the abyss with them. Again, what is important is a level playing field. The single market, the core of European integration, will only work properly if Europe has a single financial market.

Investors can and must properly assess their risk in future. In concrete terms, this means there will be an order of liability: First, these are the shareholders, and the creditors. It is certain that deposits up to €100,000 will enjoy legal protection and deposits will also be more protected than capital-like assets. With this settlement policy, we hope to have a consistent framework, and soon.

A functioning Banking Union also needs an institution that applies these rules and is equipped with the necessary tools. If in future we oversee Europe's banks at the European level, it is only logical that it should also be decided at supranational, European level what happens when a bank is no longer viable.

Full speech (in German)

© ECB - European Central Bank

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