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05 November 2013

ECB/Constâncio: Banking Union and the European crisis

Speaking in Madrid, Constâncio said that one of the main drivers of the crisis was private imbalances financed by banks in both core and peripheral countries. "For this reason, one of the most important lessons we can take from the crisis is the importance of building a genuine Banking Union."

The ECB’s Comprehensive Assessment of the main European banks

We of course do not know what the assessment will find. But we trust that the euro area banks are today better prepared to undergo such an exercise. They are much stronger than in recent years. They have significantly strengthened their capital positions and now compare reasonably well with US banks in that respect.

  • In terms of risk-weighted assets, the median Core Tier 1 ratio of the largest euro area banks currently stands at 12.7 per cent, above their American counterparts. The majority of significant euro area banks already comply with the minimum capital requirements of the fully implemented Basel III framework.
  • In terms of leverage – as measured by the ratio of equity over total assets – EU banks may at first sight appear to have lower ratios than their US peers, but as FDIC Vice Chairman Thomas Hoenig has showed, if the same accounting standards are applied then the median of the leverage ratios of large EU and US banks are quite similar.
  • In terms of absolute nominal size, if we look at the 20 largest banks in the EU and the US, the EU banks now have a capital level approximately 100 billion dollars larger.

Where euro area banks do not compare so favourably with their US peers, however, is in their low profitability and fragile investor confidence. Investors seem to be uncertain whether banks have proper asset valuations and are adequately provisioned. But this is precisely the issue the comprehensive assessment should address – it is an exercise in removing uncertainty by giving investors all the facts.

I said some time ago that markets had an excessive negative perception of European banks. In fact, euro area bank share prices, as well as price-to-book ratios, have been rising in recent months in part in anticipation of the assessment. This would suggest that investors expect the clarity provided by the exercise to be clearly positive for the euro area banking sector.

Regarding the response to the exercise, if some capital shortfalls are revealed, the private sector is today in a position to play a major part in filling them. This is more feasible than in recent years given the improvement in market conditions. Indeed, since last year banks have been improving the robustness of their balance sheets by increasing capital and provisions in anticipation of our comprehensive assessment. In this sense, the exercise is already producing results – and it indicates the willingness of banks to resolve existing problems within the sector itself.

In the same vein, given the number and size of European banks, there is scope for some consolidation within the banking sector without reinforcing the so-called “too-big-to-fail” problem. Our recent “Banking Structures Report” shows that this trend is already ongoing in Europe. Nevertheless, as a last resort, confirming the existence of public backstops is important to reassure all stakeholders of the credibility of the whole assessment exercise.


Although various explanations exist for the crisis, I am pleased that what I view as one of its important lessons is now being learned. This lesson is that a single financial market with a single currency needs a single system of supervision – and alongside this, a Single European Resolution Mechanism (SRM).

The SRM is an essential component of Banking Union. It helps break the bank-sovereign nexus by allowing banks to be resolved at the European level with minimum use of taxpayer funds. And it adds credibility to the European supervisor by providing reassurance that banks can be resolved in an orderly and efficient manner without creating financial instability – especially large cross-border banks.

With the development of Banking Union, we are creating the conditions for a more stable financial sector in the future and a better functioning monetary union. But we also need a banking sector that takes responsibility. As supervisors, we expect the banks to be better capitalised and less leveraged, more stable and efficient, to perform their indispensable role in financing the economy and supporting the ongoing, fragile economic recovery.

Because the crisis of the European economy is not over. It is true that modest growth has returned in the last six months and that countries under stress have gone through a painful but successful adjustment, reducing their deficits, correcting their initial loss of competitiveness in terms of unit labour costs and even achieving external accounts surpluses. At the same time, the recession has been deep and has left unprecedented and unacceptably high unemployment. Until economic growth is able to significantly reduce unemployment, the authorities should not become complacent in their efforts to continue the structural and institutional reforms essential to overcome the crisis.

It is clear that for the successful completion of the rebalancing process Europe needs more investment and higher domestic demand growth. We therefore need a more coordinated approach to macro-economic policy at the euro area level to achieve higher demand growth, as well as the continuation of structural reforms in all member countries in order to increase growth and facilitate a more encompassing rebalancing process. At the same time, to support national structural reforms in stressed countries, the enactment of the announced contractual programmes with financial means to support their implementation should play a significant role.

Finally, it would be important if a future decision could be reached to implement at the euro area level what is referred in the President Van Rompuy’s Report “Towards a genuine Economic and Monetary Union” as “….the establishment of a fiscal capacity to facilitate adjustment to economic shocks. This could take the form of an insurance-type mechanism between euro area countries to buffer large country-specific economic shocks. Such a function would ensure a form of fiscal solidarity exercised over economic cycles, improving the resilience of the euro area as a whole and reducing the financial and output costs associated with macro-economic adjustments”.

Full speech

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