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Banking union – Forging a European banking market

Speech by Danièle Nouy, Chair of the Supervisory Board of the ECB, at the Frankfurt 120 Round Table, Frankfurt am Main, 14 November 2017

On 9 May 1950, Robert Schuman, the French foreign minister, gave a speech in Paris in which he laid out some thoughts on political cooperation in Europe. The idea of a united Europe was born. It was born out of two terrible wars that the countries of Europe had waged against one another. The goal was to make future wars impossible. So, when we talk about the European Union today, we should not forget its original goal: peace across this continent.

But a united Europe is not just about peace; it is also about prosperity. In 1957, the Treaty of Rome laid the groundwork for a common market. The idea was to let people, goods and services move freely across borders. In 1991, this idea was extended to capital. And Europe has now become a vast Single Market which spans an entire continent and serves more than 500 million people.

And the Single Market also applies to banks, of course. For them, an important step was taken in 1993 when “passporting” was introduced. It allows banks that are licensed in an EU country to do business in all other EU countries as well. No additional licences are needed.

Still, passporting was just one step towards a European banking market. Another big step was taken when the financial crisis hit the euro area. At the height of that crisis, in June 2012, European leaders decided to set up a fully-fledged banking union.

Banking union: a significant step towards further European integration

They were aiming to prevent such a crisis from happening again. To achieve that goal, we needed to remedy the shortcomings in the way we supervise and regulate banks. And the most obvious shortcoming was that banks were still being dealt with at the national level, despite the fact that we operate in a monetary union. So, the banking union aims to achieve a more European approach.

The first pillar of the banking union was set up on 4 November 2014, when the ECB took over banking supervision in the euro area. It now directly supervises the 120 largest banks. In terms of assets, that amounts to more than 80% of the banking system. Overnight, the ECB became the largest banking supervisor in the world.

But supervising banks remains very much a joint effort. Without the national authorities, it would not be possible. They contribute to supervising the largest banks, and they are directly in charge when it comes to the smaller ones.

Now, what are the benefits of the banking union? Well, the view of national supervisors often only extended as far as national borders. As European supervisors, we have a better vantage point; we can see further. We can compare banks from across the euro area. And that helps us to spot joint problems, shared vulnerabilities and contagious links.

And we keep this European viewpoint when we take action. In other words, we are not influenced by national interests. And that is good, because in the past national interests often stood in the way of decisive and necessary action. As a result, problems were not solved; they were allowed to grow.

So European banking supervision helps to make banks safer and sounder. But let me be very clear: it is not the job of supervisors to prevent each and every bank from failing. In a market economy, banks must be able to fail. And that’s where the second pillar of the banking union comes into play: European bank resolution.

European bank resolution ensures that banks can fail in an orderly manner. That frees governments from the need to bail them out in order to protect the financial system. It also ensures that market forces can work properly. This new system of resolving failed banks passed its first test earlier this year. And that is certainly good news.

So the first two pillars of banking union go some way towards supporting a stable banking sector. But we still need to set up the third pillar: a European deposit insurance scheme, or EDIS for short.

This would take us another step closer to a stable banking sector; and it would help to align responsibilities. Banks are now supervised and resolved at the European level; but if they fail, the negative consequences are felt mainly at the national level. Clearly there is a mismatch between European oversight and national liability. Responsibilities need to be rebalanced.

We thus welcome the fact that the European Commission has revived the debate on EDIS. Still, the ultimate goal should be full deposit insurance at European level.

To sum up, the idea of a European banking union was born out of the crisis. So its initial aim was to make banks safer and sounder, to enhance stability and to prevent future crises. But the banking union is about more than that. It is also about forging a truly European banking market. That is the long-term vision.

Forging a European banking market

A truly European banking market would offer many benefits. It would be good for banks, as they could sell their services and products in a larger market. It would be good for customers, as they could choose from a greater number of banks. And it would benefit the economy, as risk-sharing would improve and efficiency would increase.

Key to that goal is a level playing field for banks. Banks across Europe must be able to compete on even ground. Only then can a European banking market emerge. And the banking union is a powerful tool when it comes to levelling the playing field.

Thanks to European banking supervision, we now use the same tools and apply the same standards when supervising banks across the euro area. This makes life easier for banks. When they do business across borders, they no longer need to comply with different supervisory regimes.

But supervision is just one part of the story. The other part is regulation. And despite the single rulebook for banks, regulation is still somewhat fragmented. The playing field is still a bit uneven.

Among other things, that is because parts of the single rulebook come in the form of EU directives. And these still have to be transposed into national law. So, what we now have could be described as localised versions of the single rulebook. That’s why we need fewer EU directives and more EU regulations, which are directly applicable in all Member States.

In addition, the single rulebook contains what are known as options and national discretions, ONDs for short. These ONDs give supervisors and governments some leeway in applying the rules. And this is another source of fragmentation. The good news is that, on the supervisory side, we now exercise many ONDs in a harmonised manner across the euro area. However, those ONDs that lie in the hands of governments should be harmonised as well.

And there is room for improvement in other areas. Take capital waivers, for example. At the moment, such waivers can be granted within banking groups, but only locally. So the European Commission has proposed that such waivers also be allowed on an EU cross-border basis. This would give banks another incentive to become more European.

So more could be done to level the playing field and forge a truly European banking market. And I haven’t even touched on other areas such as insolvency laws or tax laws. It is true that we have come a long way, but we still need to go further. The goal is worth the effort. In addition to the advantages I have already mentioned, a European banking market would help banks to overcome some of the challenges they currently face.

Take overbanking as an example. It seems that the banking sector has grown too big over recent decades. And there is a need for consolidation.

This could happen through mergers; and in a seamless European banking market, that might also include cross-border mergers. Banks could choose from a larger pool of potential partners – mergers would become more likely. So, the closer the market grows together and the more European it becomes, the more cross-border mergers we will see.

And we can take it from there. In a truly European market, banks would easily be able to operate and expand across borders – and not just through mergers. They could serve a larger market, achieve economies of scale and become more efficient. And they could attract new customers and earn additional income. All that would help them to become more profitable, and it would put them in a better position to compete at global level.

And there is more. In a truly European banking market, know-how and innovations would spread more quickly across borders. This in turn would help to make the entire sector more productive.

But there is one point to note. The mechanics of the market should be, and will be, the driving force. In other words: competition. A European banking market would favour those banks that adapt quickly and decisively. Others might be left behind.

So, in their efforts to adapt their business models, banks should not only address the much debated challenges they currently face. They should also make sure that they are ready to operate in a market that will grow closer together. They should be ready to exploit the fact that the market has expanded. At the same time, they should be ready to deal with the additional competition that comes with a larger market.

But we are not there yet. It is still a bit early to speak of “a truly European banking market”. It is still a work in progress.

A journey, not a destination

And this brings us back to the beginning of my speech and the Treaty of Rome. One of the Treaty’s stated goals was to lay the foundation for an ever-closer union among the peoples of Europe. Likewise, the goal of the banking union is to lay the foundation for an ever-closer banking market. And in a way, these goals are linked. A sound economic basis is important for a united Europe.

Now, it could be argued that the concept of ever-closer union implies a journey rather than a destination. And a journey it certainly is. Many steps have carried us forward – the banking union is a recent example.

But it seems that some people have doubts about this journey. This became clear in June 2016, when a country decided to end the journey and return to the starting point. I’m talking about Brexit, of course.

Brexit is a decision taken by the citizens of the United Kingdom that affects the entire European Union; all of us. And it also affects the banks, of course – I don’t have to tell you this.

One of the biggest issues in this context is market access. Once the United Kingdom leaves the EU, banks located there will lose their EU passport. They will lose access to the European market. And European banks will lose access to the UK market.

To regain market access, those banks based in the United Kingdom will have to set up an entity inside the EU. And the European banks operating in the UK market may have to establish a subsidiary in the United Kingdom.

That said, setting up new entities requires new licences, and obtaining them takes time. So, Iet me repeat what I have said many times before: the clock is ticking, and the affected banks have to move quickly. They have to move quickly even though the final outcome of the negotiations is still uncertain.

So, are they acting fast enough? Let us look first at the “incoming banks” – those banks that access the European market from the United Kingdom. These banks have made progress when it comes to devising plans on how to deal with Brexit. However, there are still some smaller banks which seem to be delaying their final decision on whether they should relocate to the EU.

Then there are the “outgoing banks” – those banks that access the UK market from the EU. Most of these banks have made plans by now. But I have to add here that, from our point of view, many of these plans remain a bit too high-level. This is something the banks should work on.

But we supervisors also need to act, of course. Brexit forces us to think about all these issues too. It forces us, for instance, to think further about the structure of cross-border banking groups, and how this affects their resolvability. And that will be relevant beyond Brexit.

After all, the ECB is both a home and a host supervisor. And our policies as a host supervisor can be applied to euro area banks in other countries. This creates the need for a well-balanced approach.

Let me give you an example. We will not accept empty shell companies. What does that mean? Well, we will not accept banks which merely have a letter box pinned to an office building in a euro area country but conduct all, or most, significant activities through entities located outside the EU.

Still, it seems that some incoming banks are seeking to set up entities in the euro area that are very similar to empty shells. They plan, for instance, to have the new entities transfer all market risk to group entities outside the EU. That would indeed make the new entities empty shells. And while they might be able to transfer market risks, they would take on other risks – counterparty risks, for instance, or operational risks.

So we expect banks to be able to deal with their risk without being overly reliant on intra-group arrangements. We therefore expect banks to manage part of their risks locally. With regard to market risk, banks are expected to have at least some permanent local trading capabilities and local risk committees. And they need to be able to trade and hedge with diverse counterparties – not just with other entities from the same group.

These are just some of the things that have come up as a result of Brexit. Let me add one other point; it concerns the kind of entity that incoming banks might set up.

They might, for instance, set up branches. Such third-country branches, however, would then be supervised at national level and according to national rules. This is not in the spirit of the banking union. And as countries may compete to attract foreign banks, they may trigger a race to the bottom in terms of standards. In my view, that is a problem, and we need to think about ways of dealing with it.

But incoming banks might also set up investment firms. And investment firms can be large and complex entities which operate across borders. In many cases, these firms carry out the same activities as banks do. Thus they can pose a risk to financial stability, and they can have spillover effects on banks. However, individual investment firms are supervised at the national level, often by different institutions. From a prudential point of view, this is not ideal.

So there is a supervisory gap, and this gap needs to be closed. In some countries, such as the United Kingdom, large and systemic investment firms are supervised in a similar way to banks and by the same supervisor. This might be a blueprint for the euro area as well. And given that large investment firms often operate across borders, they should be subject to European banking supervision. This idea has recently been picked up by the European Commission.

This would help us to adequately supervise all relevant entities within groups that include both credit institutions and large investment firms. And it would help us to ensure a level playing field. Systemic investment firms that conduct bank-like business would be subject to the same rules and the same supervisory standards as banks: “same business, same rules, same supervision”.

All in all, cross-border groups will become more of an issue as a result of Brexit. And in addition to all the things I have already mentioned, this creates a need for supervisors from around the world to cooperate more and better.

And here, memoranda of understanding, MoUs for short, are crucial and urgently need to be put in place. We need to conclude MoUs with supervisors from non-EU countries so that the necessary exchange of information can take place. And it’s not just the United Kingdom I have in mind. There are also US banks that might relocate from the United Kingdom to the euro area, for instance. This calls for MoUs to be concluded with US supervisors as well.

We have to put in place the conditions for a fruitful dialogue with home supervisors of foreign banks that operate in the euro area. And we have to put in place the conditions for a fruitful dialogue with host supervisors of European banks that operate outside the EU. This is another thing we have to do to forge a truly European banking market.


Ladies and gentlemen,

Europe has been growing together for a long time now. And despite all the doubts and criticism that have been voiced lately, I have never been more convinced that a united Europe is our future.

And the banking sector is no exception. We need a banking sector that does not consist of, say, Spanish, French or German banks, but of European banks. I know, of course, that we cannot create such a market by decree. But we can gradually put in place the necessary conditions, and hopefully the markets and the banks will move.

We have embarked on a long journey; that is true. But there are so many benefits to be gained along the way that each step is worth the effort.

Thank you for your attention.


Europese Centrale Bank

Directoraat-generaal Communicatie

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