Blog Post

European banking union and financial integration

At a famous summit in June 2012, the European leaders announced that they intend to “break the vicious circle” between banks and sovereigns. This decision started a new step in European integration.

By: Date: December 19, 2014 Topic: European Macroeconomics & Governance

At a famous summit in June 2012, the European leaders announced that they intend to “break the vicious circle” between banks and sovereigns. This decision started a new step in European integration. Arguably, the creation of the so-called banking union constitutes the most significant deepening of policy integration since the start of the euro. The aim of the banking union was to make the financial system more resilient and decrease the link between banks and states. To achieve this, three major steps needed to be undertaken: first, bank supervision had to be moved from the national to the European level. Second, mechanisms for bank resolution, in particular of banks operating across borders, needed to be developed. Third, mechanisms to reduce the risk for taxpayers and share the remaining risks across the union needed to be devised.

The biggest success so far is the creation of a strong and centralized supervisor in the European Central Bank.

Policy makers have made significant progress on all three; however, the work is not finished. In particular, the link between national public resources and fragile banks will remain in place for quite some time. The biggest success so far is the creation of a strong and centralized supervisor in the European Central Bank. Within about a year, the ECB has not only hired 1000 new experts for its banking supervision, it has also brought substantial transparency to Europe’s banks by assessing the quality of the balance sheets, harmonizing the reporting and running a stress test on the balance sheets. Banks that fell below certain thresholds for risk-weighted capital in these stress tests are increasing their capital to become more resilient. Yet, important building blocks remain unfinished. 

A first important question is whether the ECB as a newly established supervisor will be able to ensure that deposits can circulate freely within banking groups. In the course of the crisis, national supervisors have put limits on subsidiaries, in order to reduce the exposure of depositors to capital flows and risks in other countries. This policy has rendered bank integration across borders less beneficial and has undermined financial integration. Yet, abandoning the policy altogether has implications for deposit insurances and will therefore remain controversial.  

A second important question is how the ECB and authorities will continue the process of cleaning and restructuring the banking system. The data show that significant non-performing exposures remain in the system and as growth and inflation numbers deteriorate, these are bound to increase. Profitability in the banking system is also low according to IMF analysis. I therefore expect more bank consolidations. It is of central importance for financial integration, whether this consolidation process will be national or European.     

While up to quite recently, tax-payers were heavily involved in the rescuing of banks, new rules aim to have the creditors of banks pay for losses

A third important question is about the participation of private creditors in bank restructuring and resolution. The new European legislation establishing the banking union foresees a dramatic shift in the policy stance. While up to quite recently, tax-payers were heavily involved in the rescuing of banks, the new rules aim to reverse this picture and have the creditors of banks pay for the losses in the banks. The success of this legislative initiative will crucially depend on the credibility to stick to the new rules in case banks face problems. Bail-in will be credible if bank supervisors force banks ex-ante, i.e. before problems surface, to prove that they can withstand a negative shock without causing a new financial crisis. 

If bail-in is insufficient to solve banking problems, then fiscal resources will again be used. Given Europe’s current political integration, the joint funding mechanisms developed will only suffice for small to medium-sized banks. For the large banks, ad-hoc political agreements will have to be found. This is unavoidable as long as Europe does not achieve greater political integration. In turn, it means of course that the link between banks and states will remain in place.

Fourth, to reduce the link between banks and national sovereigns, bail-in and risk sharing will not be sufficient. Banks will also have to decrease their exposure to sovereign debt and other claims of the countries in which they are located. In the course of the crisis, this exposure has increased substantially.

The more the ECB establishes itself as a supervisor, the more financial integration will advance.

Overall, the process of repairing and deepening financial integration in the EU and the euro area in particular is bound to take time. The crisis and the political tensions of the last years have left a mark on the confidence of investors. However, the establishment of a strong supervisor in the ECB and the significant progress made in the institution building on bank resolution should rightly be considered a game changer. The more the ECB establishes itself as a supervisor, the more financial integration will advance. Creditors of banks will increasingly look for European solutions to banking problems as they can rightly claim that the ECB has been supervising the banks. Politics will continue to matter for financial integration, also for the political relations between the continent and the UK with the EU’s financial center, the city of London.

This article originally appeared in sina online


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event
 

Past Event

Past Event

Financing for Pandemic Preparedness and Response

How can we better prepare for future pandemics? In this event, co-hosted by the Center for Global Development and Bruegel think tanks, speakers will present "A Global Deal for Our Pandemic Age", a report of the G20 High Level Independent Panel on Financing the Global Commons for Pandemic Preparedness and Response.

Speakers: Masood Ahmed, Victor J. Dzau, Amanda Glassman and Lawrence H. Summers Topic: Finance & Financial Regulation, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic More by this author
 

Blog Post

The EU green bond standard: sensible implementation could define a new asset class

The proposed EU green bond standard will be less prone to ‘greenwashing’, and the widest possible set of issuers and jurisdictions should be encouraged to use the standard.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic More by this author
 

Blog Post

Banks post-Brexit: regulatory divergence or parallel tracks?

Post-Brexit UK bank regulation is not likely to compromise on international standards, but will place greater emphasis on competition, making close UK-EU dialogue essential.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 6, 2021
Read about event More on this topic
 

Past Event

Past Event

Multilateralism in banking regulation and supervision

This members-only event welcomes Carolyn Rogers Secretary General of the Basel Committee on Banking Supervision.

Speakers: Carolyn Rogers and Nicolas Véron Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 24, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area.

By: Grégory Claeys Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 9, 2021
Read about event More on this topic
 

Past Event

Past Event

Prospects for improving securities and financial reporting oversight in the EU

This members-only event welcomes Eva Wim­mer, Head of the Directorate-General for Financial Market Policy at the German Federal Ministry of Finance, for a conversation with an invited audience.

Speakers: Nicolas Véron and Eva Wimmer Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 26, 2021
Read article More on this topic More by this author
 

Blog Post

Confronting the risks: corporate debt in the wake of the pandemic

As European economies emerge from lockdowns, it is becoming clearer that corporate debt has reached critical levels. A new French scheme, in which the state guarantees portfolios of subordinated debt, shows how financial support could be targeted better.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: April 28, 2021
Read article
 

Blog Post

Urgent reform of the EU resolution framework is needed

In this blog, the authors argue that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and propose a reform of both.

By: Mathias Dewatripont, Lucrezia Reichlin and André Sapir Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 16, 2021
Read about event More on this topic
 

Past Event

Past Event

The role of the ECB in stabilizing sovereign debt markets

What are the main lessons of ECB interventions in specific sovereign debt markets?

Topic: European Macroeconomics & Governance Date: April 1, 2021
Read about event More on this topic
 

Past Event

Past Event

Presentation of the Euro Yearbook 2021

Join us for the launch of the eighth edition of the 'Euro Yearbook'

Speakers: Maria Demertzis, Fernando Fernández, Fiona Maharg-Bravo, Antonio Roldán and Jorge Yzaguirre Topic: European Macroeconomics & Governance Date: March 12, 2021
Read article More on this topic More by this author
 

Opinion

Asset bubbles won’t help our post-pandemic recovery

An unintended consequence of the virus has been ‘one of the wildest bull markets in recent economic history’ but a worsening of income distribution will have a negative impact further down the line.

By: Alicia García-Herrero Topic: Finance & Financial Regulation Date: February 23, 2021
Load more posts