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05 November 2013

ECB/Asmussen: Banking Union – essential for the ins, desirable for the outs!

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Speaking in Stockholm, Asmussen looked at what a Banking Union meant for countries inside and outside the euro area, and whether a Banking Union was sufficient to kick-start bank lending and consolidate the recovery. (Includes link to further speech: The public and the private Banking Union.)

Ins and Outs

How does the Banking Union relate to countries inside and outside the euro area?

First, the Banking Union is critical for the euro area countries.

Second, it is also desirable for Member States which do not share the euro.

And third, the Banking Union should be about strengthening the internal market, rather than dividing it in two.

The Banking Union is critical for the euro area...

The reason why we are building it is to break the vicious circle between sovereigns and banks, the manifestations of which are much more acute and disruptive in a monetary union. That is why we need the Banking Union in the single currency area. But one thing must be clear: putting the eurozone on a stronger footing will also benefit the countries that are not in the eurozone. The crisis has clearly shown that in Europe a receding tide lowers all the boats, not just the ones which are in trouble.

… and desirable for the outs

The so-called financial trilemma – in other words the impossible trinity of financial integration, financial stability, and national responsibility for crisis prevention and management – holds for the entire region, and not just for the euro area. The Swedish and Danish banking system are not only large in proportion to your GDP, but they are also very closely integrated with the rest of Europe.

Let me focus on the case of the Danish banking sector. Danish banks’ consolidated assets are almost four times Denmark's GDP. The biggest banks have considerable cross-border activities. For these reasons, it would make perfect sense for Denmark to join a Banking Union that is composed not only of a single supervision mechanism, but also a single resolution mechanism with a resolution fund that can serve as an insurance scheme in relation to systemic banks. Whilst participating in the banking union therefore appears desirable, the terms of that participation should also be right. Indeed, we at the ECB consider it of the utmost importance to ensure that the participation of the outs occurs on equal terms as the euro area countries. The safeguard clauses in the SSM Regulation, which for example allow for objections to decisions, should ensure that national specificities will be duly taken into account.

On resolution, we need to find creative solutions to ensure a level playing field between ins and outs. This holds a fortiori for the backstop for the single resolution fund which is currently the subject of much discussion. Taking part in the Banking Union from the beginning would bring many benefits. Having a chair at the table now allows participants to steer the practical implementation of the SSM – for example the development of the supervisory manual, guidelines and general instructions, as well as benefit from the ‘healing effect’ that the comprehensive assessment should bring.

Banking Union and financial integration

The Banking Union should be about strengthening the internal market, rather than fragmenting it. Both the single currency and the single market are key pillars of growth and prosperity in Europe. Both should be maintained and enhanced. Hence, the Banking Union should not create new barriers within the internal market. If countries choose not to join, they should not be discriminated against. Two safeguards will be crucial in this regard: having a single rulebook that sets the same standards for all, and having a strong and effective EBA with a fair representation of the outs.

Banking Union and the real economy

Is Banking Union sufficient to kick-start bank lending and consolidate the recovery? A Banking Union can make an important contribution to overcome financial fragmentation, and support lending. Without healthy banks, there can be no strong and sustainable recovery. Yet a Banking Union is not a ‘silver bullet’. The drought of credit is a multi-pronged problem, which requires a multi-pronged solution.

In addition to a Banking Union, I see three additional requirements for restoring lending and putting the recovery on a solid footing. The first condition is not to unravel what has already been achieved, sometimes at a high cost. As regards fiscal policies, substantial fiscal adjustment has been undertaken by the euro area countries over the last few years.

The average fiscal position of the euro area countries is much stronger than that of global peers. The euro area budget deficit is expected to have more than halved from its crisis peak of 6.4 per cent of GDP in 2009 to 2.9 per cent of GDP this year. National authorities should not backtrack on these efforts.

The second condition is to address our well-known structural problems, through well-designed reforms aiming at ensuring a smooth functioning of the EMU and the single market. Euro area governments must decisively strengthen their efforts to implement the needed structural reforms in product and labour markets. These reforms are required not only to help the respective countries to regain competitiveness and to rebalance within the euro area, but also to create more flexible and dynamic economies that will generate sustainable growth and employment.

The third and last condition is to continue resolutely on our road towards a genuine EMU. This should be our long-term objective, of which the Banking Union is now at the forefront.

Yet the other unions are equally important. If I may pick out just one, further progress on economic union is needed, as the experience with the European Semester shows that economic policy coordination is still very much a ‘paper tiger’. Only one tenth of last year’s country-specific recommendations have been implemented by the Member States. We need to explore all possible avenues to give greater “teeth” to the economic coordination processes. To our mind, the idea of reform contracts backed up by some financial incentives continues to be an interesting avenue.

Full speech

Further speech: The public and the private Banking Union at the joint conference “The Single Resolution Mechanism and the Limits of Bank-Regulation”, Berlin, 8.11.13

See also: ECB's-Asmussen calls for EU Council to agree Banking Union deal by year-end © WSJ

© ECB - European Central Bank

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