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Banking union – safe and sound finance for Europe

Speech by Danièle Nouy, Chair of the Supervisory Board of the ECB,
at the RZB EU Sky Talk, Vienna, 2 May 2017

Ladies and gentlemen,

Winston Churchill once gave a very good piece of advice. He said: “Never let a good crisis go to waste.” Well, we did have a “good” crisis in the euro area. And while all of us could have done without it, we did not let it go to waste. That’s for sure.

It was the crisis that made policymakers turn an ambitious idea into reality. The idea was, of course, the European banking union. True, the idea had been around for quite some time – at least since the late 1960s. But it required a “good” crisis to make it actually happen.

The three pillars of the banking union

The story begins back in June 2012. At that time, the crisis had reached another climax: investors were turning away from the euro area, bond spreads were soaring, and there was even talk about a break-up of the area. All in all, it was a very difficult month for the euro area.

Then, as the storm was at its height, European leaders met in Brussels. That was on Thursday 28 June. On the next day, the leaders of the euro area published a very short statement of just about 300 words which included for the first time the term “Single Supervisory Mechanism”. Europe was about to take banking supervision from national to European level. And that was just the start of the banking union.

European banking supervision is its first pillar – in other words supervision of all banks across the entire euro area to the same high standards. This helps to increase trust and make the banking sector more stable. And it helps to create a level playing field for banks and prepare the ground for a truly European banking market.

But a solid banking union needs more than just one pillar. Even the best supervisors cannot prevent bank failures – and they should not try to do so. Bank failures are a normal feature of a healthy market: unviable banks fail and their place is taken by more viable ones. That’s the theory. In practice, a bank failure can be quite messy and costly, and have systemic implications – even more so if a large cross-border bank is involved. And in the crisis, it was too often taxpayers’ money that was used to prop up failing banks, at great cost. This is not how it should be.

So in 2016, a Single Resolution Mechanism was set up as the second pillar of the banking union. The idea is to allow banks across the euro area to fail without hurting taxpayers, the financial system or the economy. This stabilises the banking sector and strengthens the market. Still, resolving banks remains a delicate task. It involves many parties and affects even more. We owe it to all these parties to be very careful and do things properly.

Resorting to taxpayers’ money must, from now on, be the exception and not the rule. Those who invest in a bank must be aware that they might lose money. There is no such thing as a risk-free investment. Retail investors in particular should be made aware of this. And that is as much a question of financial education as of proper sales practices.

The third and final pillar of the banking union is deposit insurance. This pillar still has to be erected, though. The idea is to ensure that depositors’ money is equally well protected right across the euro area. This helps to prevent bank runs and stabilise the banking sector. It also ensures what is known as the singleness of money. A euro in a German bank account must be worth the same as a euro in an Austrian bank account or a French one.

In a nutshell, these are the three pillars of the banking union. Together, they will support a stable banking sector that can reliably serve the economy. After all, banks are still a vital source of funding for European companies. And the crisis showed us what happens when that source dries up. The euro area can only grow and prosper as long as the banks are safe and sound.

So indeed, the banking union is an ambitious idea and a very good one. But at the end of the day, the proof of the pudding is in the eating. Or as we say in French: c’est au fruit que l’on juge l’arbre.

But having a good idea was just the starting point; turning it into reality required a lot of work and attention to detail. Laws had to be written, employees had to be hired, processes had to be developed and working methods had to be devised. At that point the visionaries made way for the pragmatists and specialists.

A closer look at the first pillar: European banking supervision

And with regard to European banking supervision, those people worked fast. It took them just two years to set up a huge system that spans 19 countries and comprises almost 6,000 supervisors. Half of them are fully dedicated to supervising banks at euro area level, half at national level. It’s a system that works well.

But how does it work? Who supervises the small bank on the corner, and who supervises the big banks in Paris, Frankfurt or Vienna?

Many people would probably answer: the ECB. That is true, but not entirely true. The ECB supervises the 125 largest banking groups in the euro area; eight of which are located here in Austria. But then there are 3,200 smaller banks. So, at first sight, 125 doesn’t seem very much, but consider the assets of those banking groups: they account for 82% of the entire euro area banking sector.

Those banks are supervised by Joint Supervisory Teams, JSTs for short. These teams are the cornerstones of European banking supervision. They are headed by ECB staff, but they comprise supervisors from both the ECB and the national supervisory authorities. After all, supervising the large banks is very much a joint effort. Without the national authorities, Europe-wide supervision would not work.

This holds even more true for smaller banks. They are directly supervised by the national authorities, while the ECB plays a supporting role. But both sides work closely together. For instance, we develop joint standards for supervising them. These standards ensure that small banks too are supervised to the same high standards across the euro area.

As you can imagine, supervising banks means taking many decisions. How do we go about it? To make a long story short: decisions are prepared by the ECB’s Supervisory Board, which comprises the ECB and the national supervisors from the euro area. Then the ECB’s Governing Council adopts the decisions. I will spare you the details, but be aware that this process, designed to clearly separate the supervisory tasks of the ECB from its monetary policy tasks, is complex.

This complexity is an issue because so many decisions need to be taken. In 2016 alone, we took 1,835 decisions. Not all of them were complex or difficult. In fact, a significant number of them were and will be about routine issues. But the complexity of the decision-making process puts a strain on the system and makes it less efficient.

That’s why we are aiming to amend it. We are working on an approach that would enable us to delegate some decisions to lower levels of the organisation. This would help both the Supervisory Board and the Governing Council to focus on the most important and delicate decisions.

Delegating certain decisions sounds easy, but from a legal point of view it happens to be quite difficult; that is why we won’t start delegating a large part of the routine decisions until later this year. This step will make banking supervision more efficient and effective.

I have just given you a very rough idea of how European banking supervision works. One thing should have become clear: it is a European project; it is a joint effort to make our banks safe and sound. And our work over the past two and a half years reflects this European spirit.

Since day one, we have applied a truly European approach to supervising banks. The first thing we did, for instance, was to harmonise the main tool of banking supervision, the Supervisory Review and Evaluation Process, or SREP, as we call it.

The main purpose of the SREP is to assess the risk profile of each of the 125 large banking groups. This in turn serves as a basis for deciding on capital add-ons and other measures. In that regard, the playing field in the euro area has become much more level. And we will also apply our methodology to the smaller banks – in a proportionate manner, of course.

All in all, the SREP combines the best approaches from across the euro area, so it is a truly European product. It allows us to assess banks on the basis of both hard data and our own judgement.

Being able to use supervisors’ judgement is crucial to ensuring flexible and effective supervision. In that context, I am concerned about some changes to the rules that have been proposed by the European Commission. In my view, these changes would restrict supervisory actions too much in core aspects. An adequate degree of judgement should be maintained to allow for risk-based and bank-specific supervision.

Harmonising the SREP was a big step forward. But ultimately, supervision can only be as harmonised as the rules that underpin it. For some time now, a single European rulebook for banks has been in place. However, that rulebook is not as harmonised as you might think.

First, there is the issue of options and national discretions. Here and there, too often in my view, the single rulebook gives supervisors some leeway in applying the rules. And in the past, each national supervisor used this leeway differently. Sometimes these differences were justified by national specificities, but often they were not. Together with the national authorities, we have agreed to exercise the options and discretions in a harmonised manner. This has made the rules more European and further levelled the playing field for all banks.

Second, there is the issue of regulations versus directives. Part of the single rulebook is in the form of EU directives, which are transposed into national law. It is no surprise that the results differ significantly from country to country. Hence European banking supervisors have to deal with 19 national rules instead of a single European one. This is quite costly, as you can imagine, and banks do not have a level playing field on which to conduct their business. Against that backdrop, Europe should rely more on EU regulations, which are directly applicable in all Member States.

To sum up, European banking supervision is up and running, and doing its job. We are able to look across national borders and see the full picture; we can compare banks across the euro area, identify common problems and find the best solutions. We are a tough and fair supervisor for the entire euro area, although we would be more efficient with harmonised regulation.

A big shock: Brexit

But while banking union has brought Europe closer together, something else has driven Europe apart: Brexit.

On 29 March this year, the UK officially started the process of leaving the European Union. So far, that is the only definitive step. The UK and the EU27 have entered the negotiation phase, but no one can say what post-Brexit Europe will look like.

Still, it will affect many economies, sectors and companies. Banks are no exception. There are about 40 UK banking groups that operate in the Single Market. And they would lose access to that market if a “hard” Brexit should turn the UK into a third country vis-à-vis the EU.

To regain access they would have to obtain a banking licence in an EU country. And in the euro area, it is the ECB that grants these licences, based on certain standards and expectations.

Any bank that applies for a licence must not only be well capitalised, but also well managed, meaning that it must have adequate local risk management and sufficient local staff. We will not accept empty shells. Still, we know that the need to relocate would put a huge burden on banks. We will therefore consider a phase-in period for banks.

But to make one thing clear: we have our usual high standards and we will not compromise them to attract banks to the euro area. A race to the bottom would harm everyone in the end, including the banks. Our job is to make the banking sector safe and sound. That is what we are committed to.

However, it is not just up to us. Obtaining a banking licence is just one path into the Single Market.

Some banks might seek another path by setting up what are known as third-country branches. Such branches are not supervised at European level. They are supervised at national level, according to national standards. And these standards differ between countries.

Incoming banks might exploit these differences and trigger a race to the bottom in terms of supervision. We are worried about such a scenario – particularly in respect of large third-country branches.

But the current review of the European rulebook offers the chance to attach third-country branches to what are known as intermediate parent undertakings. That would bring them under European banking supervision.

And then there is a third kind of entity that might end up on the shores of mainland Europe: broker-dealers. These entities often conduct bank-like business. Still, they are supervised by national market authorities. And again, we are worried about the risks of such a fragmented approach. In the UK, large and systemic broker-dealers are supervised exactly like banks. This is what we need in the euro area as well.

To sum up, Brexit was a big shock and is likely to change the banking landscape in Europe. But regardless of the outcome, the financial sectors of the UK and the EU will remain tightly linked. We will therefore continue to closely cooperate with the UK supervisor to ensure safe and sound banks – on both sides of the Channel.


Ladies and gentlemen, banks provide the lifeblood of the economy. A strong, healthy economy needs strong, healthy banks. And a truly European economy needs truly European banks.

The banking union aims to ensure both. It helps to make European banks safer and sounder, and prepares the ground for a truly European banking market. The first two pillars of the banking union are in place; now it is time to build the third pillar, a European deposit insurance scheme.

Then we can indeed claim to have followed Winston Churchill’s advice.

Thank you for your attention.


European Central Bank

Directorate General Communications

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