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“The banking union option – observations from my experience”

Panel intervention by Pentti Hakkarainen, Member of the Supervisory Board of the ECB, to Session 2 “Banking Union” at the event “A deepening EMU – where will it leave Sweden and Denmark?”, Stockholm, 5 February 2019

It is a great pleasure to be here today to speak with you on this important topic.

I have worked as a supervised banker, then subsequently as Chair of the Finnish Financial Services Authority (FSA), and now at the supranational level as an ECB Supervisory Board member. These jobs have given me a range of insights into the merits of different approaches to supervision.

For today’s discussions, experiences of the Finnish move from a national supervisory model into the banking union are particularly relevant. I will therefore focus on what countries that are thinking about joining the banking union can expect.

I have structured my remarks around various questions asked by our moderator ahead of today’s event.

Banking union explained – objectives and supervisory approach

Can you explain the SSM’s main objectives, tasks, and working methods?

Before 2014, banks were allowed to run their businesses across Europe, but the system of banking supervision was fragmented along national lines. The banking union was established to correct this misalignment between the reality of banks’ businesses – and the institutional supervisory structure. Consider a real case, where a bank has only a small part of its activity based in its home jurisdiction but most of its business hosted in other countries.

Whilst it took a severe financial crisis to build the political momentum for banking union, the need for a common supranational banking supervisor had been discussed frequently from the late 1990s onwards.[1] The origin of this perceived need lay in the simple reality that a fragmented system of national supervisors is not well-suited to spot the risks associated with cross-border banking or to act quickly to deal with them.

The banking union was established with a dual mandate to preserve the safety and soundness of the banking system, and at the same time to support financial integration across participating countries. The Single Supervisory Mechanism (SSM) can take advantage of the economies of scale that come from supervising banks in all 19 euro area countries.

As the SSM covers all euro area banks, it gains deep insight from comparing banks to one another and benchmarking their relative performance with the same yardstick. The broad coverage and the depth of information we collect give us substantial knowledge about the banking system as a whole. In turn, this helps to better understand each bank at the individual level.

Joining the banking union – a national FSA’s view

Based on your experience, what are the main differences in supervisory outcomes between a national authority and the banking union?

First, while the staff at the Finnish FSA remained the same when we joined the banking union – the FSA’s ability to perform its tasks was strengthened.

The ECB’s preparation of supervisory decisions on significant institutions ensures that all banks receive the same tough and fair treatment. The broad SSM framework facilitates peer analysis across a large number of similar institutions. This allows the supervisor to quickly spot idiosyncratic and potentially risky behaviour and provides it with firm grounds to challenge banks in an effective way.

Smaller national authorities particularly benefit from broadening the set of banks with whom they can benchmark with. For example, a national supervisor that only hosts one large and complex bank as a home supervisor potentially gains the ability to benchmark that bank against many similar ones across Europe. Ultimately, this stronger analytical backbone means a national supervisory authority can be more confident in the handling of individual cases. This confidence is particularly crucial in cases where tough measures are needed.

The peer analysis principle is not something that only benefits the supervision of big banks. ECB colleagues also provide rich analysis and detailed supervisory standards that enhance the supervision of smaller less significant institutions. While the regulatory yardsticks remain the same, entering the banking union allows a national supervisor to benefit from the lessons learned by our supervisory colleagues in other countries.

Quickly following the inception of the SSM, the ECB has managed to distil the best practices of experts across the euro area. These collective lessons are now available to all members, neatly set out within our guidance on supervisory expectations. These expectations are now in place for all of the most critical topics, thereby ensuring that all our supervisors have a sound basis for judging important matters such as corporate governance and internal modelling.

Second, a seamlessly functioning Single Supervisory Mechanism is able to share information across the centre and the underlying national authorities quickly and easily.

By contrast, a small or medium sized national authority working alone can find it difficult to access timely and comprehensive information – especially from banks with a foreign parent or subsidiary.

The national authorities certainly work hard to facilitate information flows across borders – for example via supervisory colleges and voluntary memorandums of understanding (MoUs). These efforts make it easier to share relevant confidential information, but not to a perfect extent. Supervisory rules and practices still tend to constrain and slow down the sharing of information between separate institutions. These frictions are even greater when institutions are from different countries. Naturally, live and urgent cases require unrestricted access to full information, and this can be ensured much more easily under the roof of a single institution.

When Finland’s FSA joined the banking union, it immediately gained full access to the supervisory information from all significant institutions across the banking union. It also gained better access to information from supervisory partners across the world, as ECB Banking Supervision is well connected to other large global supervisors.

Third, I found that joining the banking union had the welcome effect of reassuring our stakeholders that domestic banks are treated in an equal way to their peers across Europe. As I have explained, the banking union benefits from bringing together the best analytical guidance from every euro area country. This guidance creates a strong foundation for achieving a truly level playing field with consistency and predictability. Identical cases are treated equally.

Each of these three elements of my experience is positive. However, let me also be clear that being a member of the banking union is not without obligations.

For example, to benefit from the above-mentioned advantages, national authorities have to renounce part of their decision-making autonomy. More precisely, a national supervisor entering the banking union gives up some of its decision-making independence – and in return it receives an influential position over all decisions taken at the higher supranational level.

There are also some practical consequences. Supervisory work on significant institutions is carried out within banking union by Joint Supervisory Teams (JST) – who bring together both national and European perspectives. The design of JSTs implies that some of a national supervisor’s staff members will come under the umbrella of the central supervisor. National authorities accept that JSTs are led by an ECB JST coordinator, and these coordinators have a big say in how the resources of their teams are invested. Of course, there is still a lot of delegation in this system – for example, it is normal practice that the lead for a specific risk team within a JST can come from the local NCA. However, the role of the JST coordinator is central to the organisation of work.

National supervisors within the SSM are also obliged to participate in a broader range of international meetings and to engage in other forms of time-consuming cooperation. This has resource implications, but it also ensures that national supervisors are able to participate in and influence a wider range of globally relevant banking issues.

This all may sound rather complicated, but institutions have adapted to this new reality quickly. After all, it was no surprise that participating in the higher-level, broader supranational system would involve giving up some autonomy. In my experience, the positive aspects outweigh the sacrifices.

The benefits of banking union– a country perspective

What would be the main arguments for Denmark and Sweden to join the banking union?

From my perspective, the key benefits offered by banking union to its member countries are enhanced financial stability, more vigorous competition, and heightened international influence. Let me explain briefly what I mean by each of these elements.

Regarding financial stability, the banking union gives each participating country the opportunity to intensify supervisory scrutiny of their domestic banks.

This is certainly not an indictment of the quality of staff at the national level! I know from personal experience that they are extremely skilled and dedicated. What I mean is that there are clear economies of scale when it comes to banking supervision, as I explained earlier. The banking union has such broad coverage that it naturally offers certain benefits in terms of efficiency and effectiveness.

ECB Banking Supervision supervises 119 significant institutions directly, covering over 80% of the €21tn in banking assets held across the euro area. Our scale allows the ECB to invest deeply in the specialist skills needed to undertake intrusive supervision. This goes above and beyond what can be afforded under a purely national supervisory structure.

In addition to resources, the governance of the SSM – while complex – helps to reinforce objectivity in supervisory decision-making. The mix of central and local perspectives within JSTs provides the basis for healthy ongoing debate on emerging risks, and helps insulate supervisors on both sides from political and industry pressures.

Similarly, the Supervisory Board ensures that important decisions on individual banks are taken in an objective way. Short-term local political pressures carry little weight in a decision-making forum which includes board members from 18 other countries, along with the European perspectives provided by ECB board members. Bank-specific interests are put in the right context to avoid potential regulatory capture.

The incentives of the European supervisor are also well aligned with the reality of having banks running business in several Member States. This helps to maintain financial stability across the whole banking union. Within a regional financial market, financial stability issues are prone to spread across borders into neighbouring countries. Having a common supervisor for the entire area helps address this, as we are well placed to identify cross-border risks and to use our supervisory and macroprudential tools to prevent them from materialising. Mitigating these cross-border risks was very difficult, if not impossible, within the old fragmented system of national supervisors. The banking union has enabled substantial progress to be made here.

Moreover, should the risks anyhow materialise, there is a single resolution mechanism (SRM) to resolve failing banks. Thus, there is also a common resolution authority in the Banking Union, which avoids uncooperative and unilateral actions in cross-border resolution cases. Further, it is equipped with a common resolution financing arrangement to protect Member States’ taxpayers should the failing bank’s loss absorbing capacity be insufficient, which also benefits from economies of scale.

Let me now move on to the issue of competition. The Banking Union ensures that supervisory processes and attitudes are common across our member countries. This creates a truly level playing field, which gives banks more scope to compete across borders. And enhanced competition is good news for consumers and firms, who will benefit from gaining access to a wider range of options at more competitive prices.

As business conditions for banks become more and more similar across borders, expansion to other countries becomes easier. Moving towards cross-border banking models partly decouples the financial conditions available to customers from the financial health of any single country. This diversification of the banking market builds resilience, and will, over time, help to loosen the sovereign-bank nexus that links the fates of banks to that of their national fiscal authority.

From an institutional perspective, the banking union’s stronger supervisory and bank resolution structures also serve to decouple individual countries’ fiscal fortunes from those of their banking systems. These stronger structures should mean that banks are less prone to the sort of disorderly failures that require taxpayer money to clean up. Further progress towards a European deposit guarantee scheme will help propel this beneficial trend still further in the right direction. We will also need to see how the discussion on the prudential treatment of sovereign exposures unfolds in Brussels.

Unifying supervisory and resolution systems across several countries also has the advantage of reducing red tape. Banks benefit because a unified supervisory structure means there is a reduced need to report similar information to multiple authorities in different countries. Compliance costs are therefore lower in our banking union environment, where there is no need to reinvent the wheel separately in each country.

Finally, let me touch upon the benefits that banking union offers in terms of strengthening the voice of its members in international bodies. Given that the ECB is both the largest banking supervisory in the world, and one of the biggest central banks globally, we simply cannot be left out of the planning and implementation of banking regulation.

Further, when members of the banking union work together, all members can have their voices heard. Common standpoints are received ahead of key international debates, and when we speak together our message is amplified. When we work together, I have no doubt that the ECB and the national authorities are much better able to influence debates on future regulation than was ever possible before the banking union.

As I will outline in my answer to the next question, all of these benefits are just as available to countries joining the banking union through close cooperation as they are to full members.

Equal for all members, including countries cooperating closely with the ECB

Would Sweden and Denmark, and their credit institutions, be treated differently as non-euro area countries? What about the Governing Council and influence?

Countries that are outside the banking union are naturally in a different position than those that are members. They do not receive the same information and cannot influence the work of the banking union in the way that members can. However, any non-euro area EU country that was accepted to join the banking union through close cooperation would be able to participate with full rights. They would be treated the same as other banking union members. Likewise, the credit institutions based in their country would have access to the same level playing field as the other banks across the union.

When a country joins the banking union from outside the euro area, its voice is heard at all stages of the decision-making process. The staff of its national competent authority (NCA) would participate in the day-to-day supervision of large and small banks in exactly the same way as staff from NCAs of countries already inside the banking union. When supervisory decisions are presented to the ECB’s Supervisory Board, the NCA working in close cooperation will have appointed someone who can speak and vote on the decisions on their behalf.

It is true that countries who establish close cooperation would not be represented in the Governing Council. However, it is the ECB’s Supervisory Board which prepares final decisions related to banking supervision. Supervisory decisions are indeed formally finalised through a Governing Council non-objection procedure. However, in the more than four years since the inception of the SSM the Governing Council is yet to object to any of the Supervisory Board’s proposed decisions.

In the unlikely event of the Governing Council objecting to a supervisory decision on a bank from a country cooperating closely with the ECB, the country would have access to robust safeguards.

First, the framework provides for a specific procedure through which an NCA working in close cooperation can formally express its “reasoned disagreement” to an objection of the Governing Council. The Governing Council would then review its position. In addition, the NCA can refer the matter to the mediation panel – thereby providing another opportunity to resolve the issue. Lastly, if the issue has still not been resolved in a satisfactory manner, the country can choose to withdraw from the banking union. This option – which is incidentally not available to the euro area members – would ultimately still allow that country to resolve the supervisory issue in the way it wanted, just from outside the banking union.

Entering into the banking union

How does a non-euro area country join the banking union? Can Sweden and Denmark select which pillar to join, or do they have to join all relevant arrangements, such as the Single Resolution Fund (SRF) and the European deposit insurance scheme (EDIS)?

There are two key prerequisites for a country to enter into close cooperation with the banking union.

First, the country in question must adopt national legislation obliging the relevant NCA to abide by relevant ECB decisions, regulations, guidelines and requests. This is necessary to provide certainty for all involved about the basis upon which the relevant country is entering into close cooperation.

Second, a comprehensive assessment of the prospective country’s banking sector must be conducted – in line with ECB standards. This will enable the start of close cooperation to be made conditional upon the remediation of any weaknesses identified by the comprehensive assessment. Imposing this prerequisite ensures that the ECB has a solid base of information on all banks that enter into the banking union. It also allows potential weaknesses to be identified and addressed before a country joins.

Regarding the conditions for entering into the banking union, the framework provides that the establishment of close cooperation entails automatic membership of all of the Banking Union’s pillars. This means that the banks in the relevant Member State would sign up to the SRM and enter into the jurisdiction of the Single Resolution Board. In due course, the European Deposit Insurance Scheme would also apply to them. SRM membership would imply that bank contributions would henceforth go into the Single Resolution Fund and not the national resolution financing arrangement. Further, a transfer from the national resolution financing arrangement into the Single Resolution Fund is required, to fill up the country’s “share” of the Single Resolution Fund.

Full banking union membership across all pillars is, in any case, the most beneficial scenario, given that decision-making on supervisory and resolution issues should be aligned. Where supervision is European, but responsibility for resolving bank failures remain national – major tensions can arise that are not conducive to sound supervisory decision-making.


Let me conclude by recognising once again that the banking union entails both benefits and obligations for its members.

For the reasons I have outlined today, I think the Banking Union is the appropriate structure to supervise – and to resolve – banks in Europe. For all countries, and for smaller ones in particular, it also offers benefits through its ability to pool resources and invest in skills.

For a single country it is difficult and costly to build up its own supervisory and resolution institutions with resources and skills that are equivalent to those of the banking union.

It is in everyone’s interest that the design of supervisory arrangements works robustly. I therefore wish those of you who are contemplating these important issues at the moment all the best in this process.

After all, a resilient banking system and strong supervision go hand in hand – the gains are mutual to all parties; society in general, authorities, banks and citizens.

  1. For example, see: Padoa-Schioppa, T. (1999), “EMU and banking supervision”, lecture at the London School of Economics, Financial Markets Group, 24 February; and Ingves, S. (2007), “Regulatory challenges of cross-border banking: possible ways forward”, speech at the Reserve Bank of Australia conference on “The Structure and Resilience of the Financial System”, Sydney, 23 July.

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