During the Biannual high-level networking seminar on economic and financial issues, organised by Danmarks Nationalbank, Copenhagen, Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank gave an interesting speech. You can read it on oue website.
“Getting to Denmark” has become a catchphrase among those who study how societies and economies develop. And indeed, for many countries around the world, Denmark is the place to be – or rather the place to become. After all, Denmark stands for a stable democracy, sound institutions and a strong economy. And that’s not all. Denmark also stands for happiness. The United Nation’s world happiness index shows that, on top of all this, Denmark is also home to a very happy people. This has not gone unnoticed; indeed, there are many who strive to follow your example. Your idea of hygge has become a huge trend in countries as close by as Germany and as far away as the United States.
The crisis triggered a chain of reform
So on many counts, Denmark is the place to be. And I for one am very happy to be here today. But I’m not here to talk about Denmark. I am here to talk about Europe, or rather the European banking union. In my remarks, I will argue that the banking union is also the place to be. Its beginnings, though, were not exactly hyggelig. In 2012, things were not going well in the euro area. Banks were ailing, some governments were struggling to obtain the funding they needed, markets were in turmoil, and there were fears that the euro area might eventually break apart. Well, it didn’t break apart. In fact, the crisis triggered a chain of reforms, and these reforms have made the euro area more stable. One of the boldest steps was taken at the peak of the crisis. On 28 June 2012, EU leaders decided to move towards a European banking union.
Banking supervision
And move they did. Two years, four months and six days later, they had turned their political pledge into reality. On a rainy day in November 2014, banking supervision was taken to the European level. Another year later, the same was done for bank resolution. And there is an ongoing debate about whether and how all this should be supplemented with a European deposit insurance scheme. In my view, it should be, and I am certain that, at some point, it will be. From the start, the banking union has covered the entire euro area. But its boundaries are not set in stone. The banking union is not an exclusive club; it is not limited to those countries that share the euro as their common currency. In fact, any EU country can join the banking union through an arrangement known as “close cooperation”. I know that many in Denmark are very much aware of this. But, as I said, I’m not here to talk about Denmark. I am here to talk about the banking union.
The place to be
So what’s the point of the banking union? Why did policymakers feel the need to take banking supervision and resolution from the national to the European level? What benefits does it offer to its members? Well, the easy answer is that it allows us to gather some of the high-hanging fruits – fruits that are out of reach from the national level. Let me give you an example. In politics they say: he who knows only one country knows no country. The same can be said about banks. The more banks a supervisor covers, the more they can learn about each of them and, thus, about all of them. They can compare, and they can benchmark.
And European banking supervision does cover a lot of banks, many more than any national supervisor. Instead of covering just one global systemically important bank, for instance, we cover eight of them. This helps us to understand much better how these gigantic banks work, what standards and best practices they apply for different business lines and where special risks might be hidden. We do this, for example, by comparing how they set up their risk management and their governance to deal with cross-border issues. The same applies to banks with unusual business models such as specialised lenders. All in all, our broader comparative reach helps us to know and assess all the banks better and thus supervise them better.
Lack of profitability
And we also benefit from our broader view when we analyse horizontal issues. A lack of profitability is one of these issues. Here, we can pool insights from a large sample of banks, and this improves our analysis. And it’s the same with other issues, such as governance, cyber risks and the use of internal models. These models in particular are notoriously difficult to supervise, so a broad yet in-depth knowledge of industry standards and practices comes in handy. But it’s not just that we benefit from a broader view. We also benefit from a broader set of views. Supervisors from across Europe work together day in day out, pooling their knowledge and their different experiences. And at the end of the day, it is the ECB’s Supervisory Board and its Governing Council that take decisions. In other words, each decision reflects the views and opinions of 26 national supervisors from 19 countries. There is less room for national bias and less room for supervisory capture. Finally, we benefit from economies of scale when it comes to employing specialists for certain topics. If you supervise just a handful of banks, it might not be efficient to have specialists for each and every topic. But if you supervise the 118 largest banks in the euro area, it does become efficient. This is another huge advantage of European banking supervision.
Making banks safer and sounder
In short, supervising banks at the European level takes us a long way towards making banks safer and sounder. And in my view, it takes us further than purely national supervision. But I would like to clarify one thing that is often misunderstood. The best supervisors in the world cannot guarantee the success of each and every bank. Banks compete in a market. Some will do well and thrive; others will do less well and fail. They will make way for better business models, for stronger banks. What I want to say is this: sometimes banks just have to fail. And when that happens, the European resolution mechanism kicks in, the second pillar of the banking union. It ensures that banks can fail in an orderly manner. And here too, the European approach has many benefits. Let me mention just two of them.
The European resolution mechanism
First, over time, the European resolution mechanism will gain much more experience than national mechanisms. Why is that? Well, for the simple reason that it covers a much larger pool of banks and so, statistically speaking, will have to deal with a larger number of banks exiting the market. Second, there is the Single Resolution Fund, which can step in under certain conditions to carry some of the costs of bank failures in order to support financial stability. Since it is a European fund, it has much more firepower than any national fund. And that firepower would be even greater if a common backstop for the Single Resolution Fund were to be set up. In my view, that should be done as soon as possible.
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Are we there yet?
As I said, this is the vision. But are we there yet? No, not quite, but we are getting closer. The banking union has brought its members closer together; it has lowered some of the barriers that were standing in the way of a potentially seamless market. But it has not entirely removed them. While supervision has been harmonised, the regulatory framework in Europe remains somewhat fragmented. And this applies not just to minor details but also to big things. It runs counter to the idea of a single market and fosters regulatory arbitrage; and it violates the principle of same business, same risks, same rules. Every day we supervisors struggle to maintain the equal treatment of banks that have to comply with different rules even though these differences are not justified by national specificities with regard to risks.
That said, where we do have scope to act, we have made use of it. We have, for instance, agreed to exercise options and discretions contained in European law in a harmonised manner. This was a huge step, but more could be done. That, however, is up to the legislators. And there are indeed a few areas where further harmonisation would help the single market to progress: the fit and proper assessments of banks’ board members, the liquidation of banks, large exposures and the supervision of branches of non-EU banks.
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You can read the full version at the website of the BIS.
Source: https://www.bis.org/
