Euro banking union is ‘vital’

Progress on establishing a European banking union is uneven and stalled in some areas, but it is necessary for the European Stability Mechanism (ESM) to recapitalise banks and overcome eurozone tensions, deputy governor of the Central Bank, Stefan Gerlach said yesterday.

“Of course, it is difficult to build consensus in a situation where bank resolutions may become necessary, and deposit insurance schemes could be called on, in the near future. This is a matter that ideally should have been discussed and settled when EMU was formed, much in the same way as a car must be insured before it can be driven. Unfortunately, that route was not taken,” Mr Gerlach told a conference in Florence yesterday.

Last year at the Jun 29 EU Summit, eurozone leaders agreed to break the link between the banking system and member states by enabling the ESM to directly recapitalise troubled banks. However, the German government insisted that a Single Supervisory Mechanism (SSM) is set up before banking union can proceed. After much negotiation, it has been agreed that the SSM will be located in the ECB, although this has attracted much criticism.

Mr Gerlach said it was important to have an SSM in a monetary union because it puts distance between the regulator and the banks, which ensures independence from national political pressure. However, local knowledge is important, he added.

“One reason for this is that fiscal policies and many economic policies that can play an important role in setting the stage for a bubble will remain largely national. Retaining some capacity to implement national macro prudential policy will therefore be important. Overall, it seems essential to combine both union-wide and national factors in designing a SSM.”

Mr Gerlach noted that the decision to give the ECB responsibility to supervise the banks has not met with widespread approval on the grounds that it would create a potential conflict of interest. And while some concerns are real, there are a number of mitigating factors.

Membership of both the monetary policy committee and the SSM will be completely different. Monetary policy is region-wide whereas banking problems occur along national lines, he added.