The president of the European Banking Authority (EBA), the Spaniard Manuel Campa, and the managing director of the European Stability Mechanism (ESM), the Luxembourger Pierre Gramegna, published a joint article on Thursday in which they call for progress on the banking union. In the wake of the financial crisis and the sovereign crisis, the European Union created a solid institutional architecture, they say, which has withstood the successive recent blows and which has easily resisted the turbulence caused by the bankruptcy of three entities in the United States and the fall of Credit Suisse. However, the banking union remains incomplete. What is more, the urgency to complete it is lacking, they complain.
Campa and Gramegna argue that a banking union would strengthen safety nets and ensure equal protection for all depositors in Europe. “An incomplete banking union leads to fragmentation,” they explain. As long as there is no integration, banks do most of their operations within the same country and therefore lose business opportunities beyond their borders. Institutions are unable to allocate their capital where it will generate the most returns and suffer limitations in their ability to grow in a context of global competition.
Consumers and businesses, meanwhile, cannot access a wider range of financial services that could be provided by banks other than national banks. As a result, the costs of these services are higher than they would be in a more competitive market. “Banks must take advantage of the benefits of the single market to be more profitable and better serve the economy and its citizens,” they conclude. But the EBA data show that a decade after the start of the banking union, the exposure of European banks to other countries in the Union has not changed.
Although the current architecture is incomplete, the toolbox for dealing with financial problems can be expanded. “The European Banking Authority and the European Stability Mechanism are well positioned to further strengthen crisis prevention and preparedness measures,” they note.
Tasks to complete
The European Banking Authority has a key role in ensuring effective and coherent regulation. But the crisis management system and the common deposit guarantee fund have yet to be completed. In the absence of these instruments, there are alternatives to encourage cross-border banking activity. For example, regulation already allows for greater capital and liquidity flows between parent companies and subsidiaries. However, the countries where subsidiaries are based do not want them to operate undercapitalised and, therefore, this possibility does not prosper either, they point out.
Through exams ad hoctransparency exercises and European stress tests, the EBA strengthens market discipline and contributes to preventing crises. A new data centre will allow centralised access to the prudential information of the Community institutions in 2025, facilitating use and comparisons and, consequently, strengthening the role of the banking authority in promoting market discipline, the authors claim.
Regarding the European Stability Mechanism, they point out that understanding and detecting vulnerabilities early helps prevent crises and reduce their impact. The ESM is the permanent crisis resolution mechanism for the euro area, so it monitors the financial and economic conditions of member countries and tries to anticipate risks, vulnerabilities and political responses, which helps to minimize the associated costs. Precautionary instruments, those credit lines that are provided to countries in case of need, serve to prevent crises from escalating, are available as a buffer against unforeseen events for all euro countries and counteract fragmentation, reducing uncertainty in the markets, the article stresses. “They can provide essential support when new shocks external events occur or if national security networks prove insufficient,” they point out.
Expand the scope
The indirect bank recapitalisation instrument, which was used in Spain, remains relevant as it can help the financial sector in the face of liquidity stress. It could also be considered for financial institutions other than banks, suggest Campa and Gramegna. The ESM Treaty, which is still pending ratification, creates the legal basis for new tasks and a new instrument: the backstop mechanism for the Single Resolution Fund, helping with an orderly resolution of large banks if the SRF runs out of resources to address it. This is a second line of defence that reduces uncertainty and minimises the impact of a bankruptcy on financial stability and fiscal discipline. Moreover, in the authors’ opinion, it reinforces the confidence of international investors in our banking system.
Collaboration between European institutions is key, improving the ability to detect risks and respond quickly to crises. This is how we minimise the costs of an incomplete banking union, they stress. And cooperation can take the form of regular exchanges of information, crisis simulations and other projects. The EBA and the ESM are committed to deepening their collaboration and improving their analytical capabilities.
While preparation is crucial, it falls short of full banking integration with a common safety net, Campa and Gramegna warn. Without it, they explain, there is a risk that necessary measures in the financial sector will be delayed just to avoid negative market reactions and contagion. “The confidence that a full banking union provides is unparalleled,” they conclude.
Strengthening the resilience of banks and the credibility of the institutional framework will pave the way for the construction of the banking union. They add that the integration of capital markets should go hand in hand with the banking union. Campa and Gramegna welcome the renewed interest in developing a common capital market: “It will multiply the ways of diversifying risk, allocating capital and absorbing risks.” shocksand will fully release the resources available to finance economic growth and innovation.”
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