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Implementing the Banking Union

Implementing the Banking Union. Patrick Bolton Columbia University. Outline. Single Supervisory System (SSM) is a necessary condition for an integrated banking system It is a key step towards the resolution of the European Banking Crisis

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Implementing the Banking Union

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  1. Implementing the Banking Union Patrick Bolton Columbia University Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  2. Outline • Single Supervisory System (SSM) is a necessary condition for an integrated banking system • It is a key step towards the resolution of the European Banking Crisis • A major political achievement involving a balanced governance structure • Open Questions about the functioning of the SSM • The SSM and Single Resolution Mechanism are far from sufficient to solve the European Debt Crisis • Major Question: how will the Eurozone delever? Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  3. A Necessary Step to Preserve the Union The financial crisis of 2007-09 has brought to light important centrifugal forces in the Eurozone that undermine the integrity of the banking system: • link between banks and sovereigns • flight to quality of deposits (etc.) • credit crunch and breakdown of bank lending channel • host country regulatory steps to impede cross-country flow of funds Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  4. Cumulative Euro-Area Deposit Flows, 2011–12 (billions of Euros) Source: IMF Report 2012 Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  5. Credit Growth to the Non-Financial Private Sector Source: IMF Report 2012 Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  6. Bank Regulatory Nationalism EXAMPLES: • Icelandic banking crisis • Conversion of local subsidiaries into branches of parent bank (Deutsche Bank in Portugal and Hungary) • BaFin & Unicredit’s German subs. • FSA & U.K. subs. of Santander • Etc. Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  7. Single Supervisory System (SSM)How will it function? • ECB oversees largest banks and cross-border banks (around 100 banks?) • A separate Supervisory board composed of representatives of all Eurozone member states • Decisions made via majority voting (simple majority + qualified majority…) Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  8. SSM: How will it function? • Non-euro area Member States can join SSM • they then become voting members of the supervisory board… • but not of the ECB Governing Council (steering committee)… • Mediation panel • Sweden, Czech Republic and UK won’t join… Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  9. SSM: How will it function? • Cooperation between EBA and ECB: • Majorityvoting by EBA members outside the SSM • what are the incentives to join the SSM? • what are the implications for cross-border banking between SSM-members and non-members? • can the SSM override FSA capital and liquidity requirements imposed on Eurozone banks? Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  10. Single Resolution Mechanism • An essential step to delink banks and sovereigns • Goal is: early intervention + bailing-in + bridge banks • “a pecking order of bailing-in shareholders and some creditors, and relying on the banking industry ”… • “..should include an appropriate and effective common backstop (an ESM credit line)” • direct bank recapitalizations by the ESM but not before March 2014! Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  11. How will the Eurozone Delever? • The pernicious effects of debt overhang are best cured through ‘debt restructuring’… • But no major bank debt restructurings in the cards before 2014? • Will there be any? • No more sovereign debt restructurings in the cards? • So how will the Eurozone delever? Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

  12. Bank Leverage(Adjusted tangible assets to Tier 1 common capital) Source: IMF Report 2012 Corporate Governance and Banking Union in a transatlantic perspective ECGI Brussels 17 December 2012

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