Banking union, three years on – has it lived up to its promises?

Statement by Danièle Nouy, Chair of the Supervisory Board of the ECB, at the Single Resolution Board Conference, Brussels, 29 September 2017

The banking union is being built on the lessons from the financial crisis. It has made two promises: it will ensure that banks are safer and sounder, and it will pave the way for a truly European banking sector. Setting up the first two pillars, the Single Supervisory Mechanism and the Single Resolution Mechanism, were important steps towards these goals.

But the banking union hasn’t yet lived up to its promises because it is incomplete. Its third pillar is still missing: a European Deposit Insurance Scheme, or EDIS for short.

This makes the new system a bit inconsistent. Banks are supervised and resolved at European level, but in the event of a failure, the negative consequences are felt mainly at national level.

Let me explain. Imagine that, due to Brexit or some other reason, a large international banking group selects a euro area country for its EU head office, with branches across the rest of the euro area. As it is a large bank it will be supervised and, if things go wrong, resolved at European level. But if that were to happen, the national deposit insurance scheme of the country where its head office is located would have to refund depositors in other countries as well.

The case is similar for subsidiaries. If, for instance, the Spanish Banco Popular had actually failed, Portugal’s deposit insurance scheme would have had to refund depositors in the Portuguese subsidiary. That is a consequence of having supervision and resolution at European level. The Portuguese authorities would not have been involved in either process. Clearly, there is a mismatch between European oversight and national liability. Responsibilities need to be rebalanced.

Likewise, there is a single European rulebook and a single European supervisor for banks. So shouldn’t depositors across Europe be treated in the same way? They all need to be confident that their guaranteed deposits are equally protected wherever they are. A euro has to be a euro no matter whether it is in a German bank account or a French one. This is crucial for the single currency and a truly European banking system. That’s why the third pillar of the banking union is needed – and it should be set up sooner rather than later.

But let me now turn to the first two pillars of the banking union. Banks today are much safer and sounder than they were before the crisis. They hold much higher capital buffers and have become much more resilient. This is the result not only of stronger regulation, but also of a more European approach to both banking supervision and resolution.

Let me quickly mention a few of the benefits of European banking supervision. First, it ensures that banks across the euro area are supervised according to the same high standards. We now use the same main tool for supervising banks, the Supervisory Review and Evaluation Process, or SREP. Moreover, we have made the regulatory playing field more level as we agreed to exercise the options and discretions provided by EU rules in the same manner across the euro area.

Second, European banking supervision can take a European perspective. European supervisors can compare banks across borders, and hence spot and address problems earlier. For instance, as a response to the high levels of non-performing loans, we have devised guidance to push banks to reduce their outstanding bad exposures. In this context we also encourage banks to improve their risk management and urge them to refrain from embarking on a risky search for yield. We assess how reliable the internal models are that banks use to determine their capital needs. And we guide banks towards sound risk management with respect to leveraged transactions, which seem to be on the rise.

Regarding the second pillar of the banking union, the Single Resolution Mechanism, we can now say that, together with the Bank Recovery and Resolution Directive it has passed its first test. This is a big step forward: banks can now fail without disrupting the entire financial system. Still, lessons can be learnt from the recent bank failures. Supervisors should, for instance, be equipped with moratorium powers in order to react with the needed flexibility, if the situation of a bank deteriorates rapidly.

Ladies and gentlemen, the banking union is going in the right direction. But more needs to be done to help it keep its promises. As I said earlier, in addition to setting up European deposit insurance, banking regulation and supervision need to be fully harmonised. In that respect, legislators should make more use of EU Regulations as opposed to EU Directives if they are serious about being efficient and having a level playing field. Beyond that, insolvency regimes differ widely between countries and stand in the way of a truly European banking sector as well as of the future capital markets union.

But let me be clear: regulators and supervisors can only set the scene. Once all the pieces of the banking union are in place, it will be up to banks to explore and capitalise on the benefits of a European market. Only then will we be able to determine whether the banking union has really lived up to its promises.

Thank you for your attention.

Media contacts