banking union and fiscal union in europe: outlook and...
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Banking union and fiscal union in Europe: outlook and implications for global partners
Asia-Europe Economic Forum 13 January 2013
John Berrigan, DG ECFIN
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24/01/2013 2
Outline
• Consequences of crisis for EMU construction
• Reinforcing EMU (focus on Banking Union)
• Implications of Banking Union for participants and partners
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Consequences of crisis for EMU construction (1)
• EMU construction unique: single monetary policy, with co-ordinated but decentralised fiscal/structural policies
• Conventional wisdom that deep political integration required for durable currency union
• Was EMU construction flawed from the outset?
24/01/2013 3
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• Economic logic of EMU reflected both direct benefits of euro (e.g. macro-stability, lower transaction costs, enhanced financial-market liquidity) and indirect benefits (i.e. incentives for structural reform)
• Euro removed option of devaluation as means to avoid reform
• EMU construction ensured cost of "non-reform" could not be shifted to supra-national level
24/01/2013 4
Consequences of crisis for EMU construction (2)
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• In retrospect, several pre-conditions for the effective functioning of EMU construction…
o Member State compliance with a comprehensive rules-based policy coordination framework
o Financial-market discipline to support policy co-ordination
o Integrated financial stability architecture
o Capacity to pool fiscal resources in support of monetary policy in response to specific shocks, notable financial shocks
24/01/2013 5
Consequences of crisis for EMU construction (3)
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Consequences of crisis for EMU construction (4) • …but EMU launched in coincidence with "Great
Moderation"…
o Policy co-ordination framework proved inadequate
o Market discipline absent amid mispricing of risk
o Too slow progress in completing financial-stability architecture
o Concept of burden-sharing remained undefined in operational terms
• … resulting in deficiencies in crisis prevention and management
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Reinforcing EMU (1) • Medium-term dimension of EA crisis response focused on
reinforcing the EMU construction
o Policy co-ordination framework strengthened and expanded
o Acceleration in completing financial-stability architecture – Banking Union
o Establishment of crisis management instruments: EFSF/EFSM/ESM
o First steps toward "fiscal capacity" at EMU level
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Reinforcing EMU (2) – Banking Union
• Key reinforcement of EMU is the creation of Banking Union (BU)
• Rationale of BU is to address negative feedback loop between banks and national sovereigns via
o Neutrality in oversight
o Readiness to resolve and allocate losses among private creditors
o Possibility to mutualise remaining financial costs via common fiscal backstop
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Fiscal – Financial interdependence: CDS spreads of sovereigns versus banks (bps)
Source: Bloomberg.
9
0
500
1,000
1,500
2,000
2,500
3,000
2007 2008 2009 2010 2011 2012
IE SovereignBank of IrelandAllied Irish BanksIrish Life and PermanentAnglo Irish Bank
0
200
400
600
800
1,000
1,200
1,400
1,600
2007 2008 2009 2010 2011 2012
PT SovereignCGDBanco ComercialBanco Espirito SantoSantander TottaBPI
0
100
200
300
400
500
600
700
800
900
2007 2008 2009 2010 2011 2012
IT SovereignUnicreditIntesa SanpaoloBMP SienaBanco PopolareUBIBNL
0
100
200
300
400
500
600
700
800
2007 2008 2009 2010 2011 2012
ES Sovere ignSantanderBBVACaja MadridLa CaixaBco Sabadell
Brussels, 16 October 2012
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Financial sector fragmentation in the EA
Interest rates on mortgages, %
Note: Data for new loans. Source: European Central Bank.
10
Cyprus, 8 October 2012 Fiscal–financial interdependence
Interest rates on loans to SMEs, %
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• Main components of BU are inter-related...
o Single Supervisory Mechanism/Single rulebook
o Common resolution framework with private funding
o Common deposit insurance framework (later)
o ESM as common backstop
• ... and all are required to ensure coherence
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Reinforcing EMU (3) – Banking Union
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• Substantial progress on Single Supervisory Mechanism
• MS have reached general agreement that
o SSM focused on euro area but open to all MS o ECB conferred with specific tasks within SSM and directly supervises
significant banks; o Strict separation of ECB monetary and supervisory responsibilities o National supervision of remaining banks integrated into SSM o Role of EBA will be preserved o SSM to be in place by March 2014
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Reinforcing EMU (4) – Banking Union
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• Proposal for SSM will now be agreed with European Parliament
• Council and EP will proceed with co-decision procedures on Commission proposals relating to bank capital requirements and bank restructuring/resolution
• COM will bring forward legislative proposal for Single European Resolution Mechanism
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Reinforcing EMU (5) – Next Steps
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• BU a pooling of national sovereignty among participants
• Responsibility for effective prudential oversight, crisis management and associated fiscal costs will be shared
• Full co-operation among MS essential at all levels of BU
• Fiscal burden sharing is key to align MS incentives to co-operate, so must have agreement on "bailing-in" to limit potential size of burden
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Implications of Banking Union for participants
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• More resilient EMU within global financial system eases current crisis and reduces probability of future crises
• BU consistent with existence of Single Market, but not neutral in its effect
• Pooling of sovereignty in BU may imply changes in approach to risk management among public and private actors
• Any changes in dynamics of EU financial integration must be managed within Single Market
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Implications of Banking Union for partners
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24/01/2013 16
Thank you for your attention
Presentation by John Berrigan, European Commission
21 January 2013