‘Cleaning up bank balance sheets is key’

An EU capital market union should be set up to complement an EU banking union in order to rebalance debt and equity financing across the region, according to the chairman of the European Banking Authority (EBA), Andrea Enria.

‘Cleaning up bank balance sheets is key’

The eurozone banking system is still fragile and over-indebted, said Mr Enria, speaking at a lunch in Dublin organised by the Federation of International Banks in Ireland.

“Hence, the most important step is to complete the process of cleaning banks’ balance sheets and providing the right incentives for write-downs and restructuring of private debt, also through debt-to-equity swaps. Several initiatives have been put in place at national levels to facilitate this process,” he said.

“We have to learn from these experiences and promote best practices. More generally, restoring a well-functioning, integrated EU financial market will also call for a rebalancing between debt and equity financing,” he added.

“This, I believe, should be the core focus of the project for a capital market union.”

Mr Enria noted that moves towards a banking union were well under way and the fragmentation seen across the banking system over the past few years was receding, but many challenges remained.

Not least of there were the development of a securitisation market aimed at boosting bank lending.

The ECB will launch a purchasing programme for asset-backed securities over the next couple of months.

The market is relatively embryonic in the eurozone.

Mr Enria said there should be harmonised and enhanced indicators for tracking SMEs credit performance and credit quality across the region. There was also a need for co-ordinating the role of ratings agencies.

As part of banking union, supervision will move to Frankfurt for roughly 85% of eurozone banks.

However, macro-prudential policy remains a competence of member states.

For example, the Irish Central Bank introduced mortgage cap rules over the past week aimed at taking some of the froth out of the housing market.

There should be moves towards harmonising macro-prudential rules, however, he said.

“The EBA’s view is that we should remain focused on protecting the unity of the EU market, not only through micro-prudential rules, but also through the macro-prudential toolkit,” Mr Enria said.

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