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The road towards a truly European single market

Speech by Andrea Enria, Chair of the Supervisory Board of the ECB, at the 5th SSM & EBF Boardroom Dialogue

Frankfurt am Main, 30 January 2020

Less than a year ago, I spoke to you about the priorities for the next few years. One of them was the need for a deeper integration of the European banking sector.

Today I will begin by looking back at what we have already achieved, before turning to the future and the issues we still have to tackle. As years go by, through milestones and detours, to me, our goal remains clear: we need to finally and fully complete the banking union and achieve a truly unified domestic market for all our banks.

I’ll briefly compare the EU and US experiences of banking integration, as I think there is at least one lesson to be learnt: the integration of financial flows is never truly beneficial or sustainable in the absence of common rules, supervisory policies and institutions.

We have come a long way in achieving integration, but I think we can make better use of the current legislative and institutional set-up to regulate and supervise EU cross-border groups as integrated entities. This should be done alongside the implementation of the institutional integration plan we initiated when we launched the banking union. Market integration will only deliver resilience if the institutional setting adapts, and it is our duty to get there before next shock hits.

Integrated banking markets – a tale of two jurisdictions over a quarter of a century

Let’s start with the most significant step towards a single financial market in Europe. In 1993, the single banking licence and passporting entered into force. This mechanism was crucial in consolidating the European Single Market. It allowed banks authorised in one Member State to establish branches or provide services in other Member States, without the need for any additional licences. The holy trinity of European integration became mutual recognition, home country control and regulatory harmonisation – though, more often than not, on a minimum level.

One year later, in 1994, on the other side of the Atlantic, President Bill Clinton signed the Riegle-Neal Act, a crucial milestone in the journey towards an integrated banking market in the United States. Just like the single banking licence, the Riegle-Neal Act enabled US banks to reach out across state borders. It accelerated tremendously the consolidation of the US banking market: the number of organisations with offices in more than one state more than doubled from 1990 to 2005.

So the single banking licence and the Riegle-Neal Act were very similar in substance. But if we compare the European and US banking markets today, we can see that these two legislative initiatives did not yield similar results. While the US banking market was mostly integrated within a short time frame, in Europe market integration is much less visible, even today.

So what happened?

First, there was a gap in prudential regulation that was never closed. Following the establishment of the Single Market, banking became increasingly cross-border in nature, but this was not initially accompanied by the development of a regulatory framework at the supranational level – and this gap became even more obvious during the crisis. Instead, the regulatory focus was on domestic banks, which exacerbated the crisis at numerous crucial moments. By contrast, the United States had place a unified prudential framework that included common banking supervision, harmonised regulation and a common resolution framework with a common fiscal backstop.

Second, the broader European legal framework did not facilitate business across borders either. Since 1993 European corporate and consumer protection laws and our insolvency and tax regimes have formed more of a patchwork of legal, regulatory and supervisory approaches, with national practices overlapping in some aspects and colliding in others. In many areas this still holds true today, whereas the United States offers an almost seamless framework across most of these legislative areas.

And finally, cultural differences may have further reduced the appetite for cross-border consolidation and cross-border branching. There is some evidence that cultural differences increase the complexity, and therefore the costs, of scaling up in size. It is safe to assume that such aspects were almost negligible during the integration of the banking markets of different US states.

But haven’t we come closer as Europeans too in the time that has passed? What have we done in this quarter of a century to harmonise our practices and converge our ways of doing business?

Progress in the EU since the 1990s

It is indisputable that the regulatory and supervisory framework we have now is much more harmonised than the one we had in the early 1990s. From my time at the Committee of European Banking Supervisors, roughly 15 years ago, to where we stand now with European banking supervision, it is clear that we have paved the way for deeper financial integration.

We have strengthened regulation, implementing global standards through an increasingly extensive set of European regulations that are directly applicable to all banks operating in the EU.

We have developed a unified body of technical rules, with the European Banking Authority (EBA) publishing over 250 guidelines and regulatory and implementing technical standards. The single rulebook has become a reality.

We have gone from having no common definition of capital to a fully uniform one that assures investors and creditors, including depositors, that the capital held at banks is quality-proofed and ready to absorb losses in the event of a crisis.

We have gone from no common definition of liquidity requirements – which had severe consequences during the crisis – to a fully harmonised one that is enshrined in European regulations.

And we have gone from different definitions of non-performing loans – which heightened market uncertainties about the value of European banks’ balance sheets at the peak of the crisis – to a fully standardised one that applies across all EU countries.

In practice, however, full harmonisation was still challenging to implement. Before the banking union was established national practices tended to prevail – even in the presence of common rules based on European regulations, which should be directly and uniformly applicable. This impaired the ability of the Single Market to work as a genuine single jurisdiction.

But this experience simply highlights how important it is that policymakers working towards a truly single banking market do so as part of a joint effort. The progress made in supervision supports this conclusion. In fact, the establishment of a single European supervisor in the banking union seems to have shaken things up decisively – and for the better.

Take Pillar 2 requirements. They had a common legislative basis and were governed by common EBA guidelines, but in practice they were implemented very differently across countries. Yet since 2014, they have been applied evenly across all euro area banks, from the largest to the less significant ones, according to common methodologies. For significant institutions, the Pillar 2 process is run by the Joint Supervisory Teams and decisions are taken by the ECB Supervisory Board. We have continuously tightened our internal quality assurance and consistency checks to ensure a real level playing field across banks – and I intend to further strengthen this process. And starting this year, we are providing enhanced disclosure of the results of the Supervisory Review and Evaluation Process (SREP), with the annual publication of the Pillar 2 requirements for individual banks.

To take another example, the fact that the ECB has pushed banks to tackle their non-performing loans (NPLs) has led to a massive and speedy reduction of the volume of NPLs in the euro area. I doubt that national policies alone would have managed to establish a harmonised approach that could have yielded the same results in such a compressed time frame.

So, when it comes to supervision, Europe is now definitely less of a patchwork. Wherever banks operate, they are supervised according to the same high standards, the same approaches and, ultimately, by the same people.

This makes it easier for banks to operate across borders, and it has made the banking sector safer. But has the sector also become more European in nature? Not yet, I’m afraid. It is quite clear to me that euro area banks cannot and do not yet consider the banking union as a truly domestic market.

Patchwork or seamless market? The European banking sector in 2020

The segmentation of banking markets within the euro area is one of the most concerning legacies of the financial crisis. Banks were bailed out by national governments, under a loose coordination framework defined by the Council, and with lighter scrutiny exercised under the State aid framework. Integrated cross-border groups were broken down along national lines to allow national tools to be deployed to manage crises; and the often difficult negotiations to bring about these results dented the trust between Member States.

Banks that received support from their national government were often asked to refocus their business to support the domestic economy. This was reflected in a sharp decline in cross-border banking, even within the euro area. Since then, we have made progress in designing a stronger crisis management framework, with greater reliance on private investors being bailed in rather than the banks being bailed out by governments. The establishment of the Single Resolution Board and the Single Resolution Fund have been important steps forward. But the safety net is not yet fully established at the European level. As long as deposit insurance remains national, Member States will have an incentive to ring-fence their banking sectors. This is why we need to finalise the banking union by establishing a European deposit insurance scheme.

We see that Member States are still reluctant to stop exercising national discretions and dismantle the various remaining obstacles to group-wide asset and liability management. Just take the legislative provisions on waivers, which stipulate that such instruments apply at a national level, but not across the banking union. This heavily restricts the free flow of capital and liquidity within cross-border banking groups, which in turn makes it much less attractive for banks to operate across borders. This happens because there is still a lack of trust in the framework for crisis management.

In my view, advancing towards a single European market will require not only more integration, but also adequate safeguards for host countries so they feel confident about lowering some national barriers. Tackling these issues and improving crisis management might lower the perceived costs of pulling down some of the fences that still surround national banking sectors.

In this context, intragroup waivers play a key role. EU banking rules give supervisors the option to waive the application of liquidity requirements at the level of individual banks and, instead, to allow banking groups to meet those requirements on a group-wide or sub-group basis. In theory, such waivers would make it more attractive for banking groups to reach across borders.

But in practice, some Member States have imposed limits on exempting intragroup exposures from the large exposure requirements. This, in turn, limits the discretion that ECB Banking Supervision has to grant cross-border liquidity waivers and thus restricts banks’ freedom to move liquidity within their groups and benefit from the availability of liquidity waivers.

The ECB may also grant complete waivers for capital, large exposures and leverage requirements at solo level, but only for subsidiaries within the same Member State, and not in a cross-border context within the banking union. A similar approach has recently been adopted for the waivers for minimum liabilities requirements under the revised Bank Recovery and Resolution Directive – the BRRD2.

These are clear examples that show that EU legislation is, and has always been, more restrictive for banking groups operating across national borders within the EU than for groups operating within a single Member State. And these are all missed opportunities on the road towards the establishment of a truly single banking market.

But if we want to make progress, we should also acknowledge and address the concerns of those Member States that consider that progress in market integration should proceed hand in hand with strong and credible commitments to a joined-up, group-wide approach in the event of a crisis. It would be difficult to envisage the centralised management of capital and liquidity at parent level if there is no clear understanding of how to deploy capital and liquidity support to subsidiaries within the banking union in the event of idiosyncratic shocks.

I have argued before that EU institutions should agree on a roadmap for the definitive completion of the banking union, one where identifying and removing the obstacles to cross-border business and mergers is a key priority. I am aware that EU roadmaps often involve long-term and politically charged overhaul projects – and are therefore challenging to implement. But I would be willing to adopt a more practical approach to see what can be achieved in the shorter term using the tools currently at our disposal.

More concretely, ECB Banking Supervision is considering a range of options, such as enhancing the possible role of group support agreements for subsidiaries in banking group’s recovery plans, which are approved by all the authorities involved. We are also open to facilitating the granting of cross-border liquidity waivers at the solo level to the extent possible within the current legislative framework. Finally, we are exploring the viability of the cross-border reorganisation of banking groups. This would allow for the branching structure to be used more widely, at least within European banking supervision, which would finally result in the production of a single passport of the sort conceived in the late 1980s.

These are just some initial ideas, of course. They might not be suitable in all circumstances, but they would be a starting point – to which we could add, for example, a more strategic use of the SREP by gearing it towards facilitating the cross-border integration of the European banking sector.

And although these are preliminary thoughts, I hope they convince you that ECB Banking Supervision is seriously committed to promoting an integrated European banking sector. I am convinced that the incentives of policymakers and supervised entities are fully aligned in this regard.


The idea of an internal market is foundational to the European project. In hindsight, when it comes to banks, it was probably too optimistic to think that the framework of the single passport would do away with all, or even most of the obstacles that banks face when doing business across borders.

To be fair, much has happened since the early 1990s. The EU, and in particular the euro area, have done a lot to pave the way for real integration.

What we need now is extra effort from policymakers to create the conditions for banks to basically consider the banking union as their domestic market. I have touched upon some of the issues we still need to address, and laid out what still needs to be done.

Creating a framework that is conducive to cross-border banking is just part of the story, though. It is then up to banks and their customers to take advantage of it. Banks should embrace the opportunity to tap a larger market and find the courage to reach across borders. ECB Banking Supervision stands ready to engage with banks that are proactively looking to create the conditions for more integrated functioning within the banking union, as the scope of those solutions will necessarily be European rather than merely domestic. And we will also continue to advocate for the legislative changes needed to facilitate the establishment of an internal market in banking.

But while complex political negotiations play out, we cannot stand still. Our destiny, or at least a significant part of it, is in our hands. And we must keep going.


Den Europæiske Centralbank

Generaldirektoratet Kommunikation

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