Building the European Banking Union in Times of Crisis

SYstemic Risk TOmography:Signals, Measurements, Transmission Channels, and Policy Interventions

Ignazio AngeloniEuropean Central Bank

Brescia, 25 June 2013

2

Weaknesses of the Maastricht blueprint

• “Narrow” monetary union: one currency, independent central bank, efficient interbank market and settlement

• No EU fiscal or supply-side policies• Reasons: both diplomatic and intellectual• Conflicting views on banking supervision Complement to monetary policy, hence should be centralised Hardwired to national politics, hence decentralised

• Treaty provisions General support to national supervision authorities ECB may be assigned “specific” prudential supervisory tasks,

by unanimous Council decision (art. 127.6)

3

All seemed fine until 2006

• Changeover technically seamless• Financial “integration”: Immediate establishment of a single money market Negligible sovereign bond spreads Cross-border bank M/A in the early EMU years

• Favourable global economic conditions• Credit boom in several euro area countries• Competitiveness gaps and current account

imbalances slowly building up, easily financed by private capital flows

4

Sovereign spreads

Dispersion of euro area ten-year sovereign bond yields(percentages)

Sovereign spreads declined, especially in the countries where they had increased the most in the preceding months.

Sources: Bloomberg and ECB calculations.

5

Target imbalances

Source: ECB, NCB and IMF data and author’s calculations (P. Cour-Thimann, Target balances and the crisis in the euro area, mimeo).A positive (negative) sign reflects a net claim (liability) of the national central bank vis-à-vis the ECB in the TARGET2 payment system. Claimsand liabilities (including that of the ECB) add up to zero.

6

International risk sharing

(total time line)

0

3

6

9

12

15

18

0

5

10

15

20

25

30

Mar 2000

Nov 2000

Jul 2001

Mar 2002

Nov 2002

Jul 2003

Mar 2004

Nov 2004

Jul 2005

Mar 2006

Nov 2006

Jul 2007

Mar 2008

Nov 2008

Jul 2009

Mar 2010

Nov 2010

Jul 2011

Mar 2012

All Regions (LHS) Advanced Economies ex EZ (RHS)

EMEs  ex EU (RHS) Emerging Europe (RHS)

Non‐distressed Euro Area (RHS) Distressed Euro  Area (RHS)

0.0

0.3

0.7

1.0

1.3

1.7

2.0

0

3

6

9

12

15

18

Mar 2000

Nov 2000

Jul 2001

Mar 2002

Nov 2002

Jul 2003

Mar 2004

Nov 2004

Jul 2005

Mar 2006

Nov 2006

Jul 2007

Mar 2008

Nov 2008

Jul 2009

Mar 2010

Nov 2010

Jul 2011

Mar 2012

All Regions (LHS) Advanced Economies ex EZ (LHS)

Emerging Europe (RHS) EMEs  ex EU (RHS)

Claims of euro area banks(USD tr.)

Claims of all BIS reporting banks(USD tr.)

7

Fiscal-banking loop

Source: ECB.

Sovereign and bank CDS spreads: euro area and US(2010 – July 2013; basis points)

Source: Bloomberg.Note: Average CDS spread for euro area and US LCBGs and countries where LCBGs are located.

0

50

100

150

200

250

300

350

400

450

0 50 100 150 200 250 300 350 400 450

Bank

CDS

Sovereign CDS

euro area

United States

88

Bank loans to non-financial corporations (percentage change per annum)

Source: ECB.

Short-term interest rates on smallloans (up to €1mn) to non-financial corporations(percentages per annum; rates on new business)

Source: ECB. Source: ECB.

National boom-bust cycles

9

Funding of non-financial corporations in the euro area and the United States

(2002 – Q1 2012; cumulated debt shares)

Source: Cour-Thimann and Winkl (2013)

Total bank assets in the EU, Japan and the US(2012, EUR trillion; percentage of GDP)

Source: ECB, FDIC and Bank of Japan.

0%

35%

70%

105%

140%

175%

210%

245%

280%

315%

350%

0

5

10

15

20

25

30

35

40

45

50

EU USA Japan

GDP Total assets Ratio (rhs)

Overbanking

10

Total assets of domestic banks(percentage of domestic GDP)

Source: ECB. Other countriesProgramme countries

Overbanking

0

100

200

300

400

500

600

CY PT GR IE NL ES FR AT DE LU IT BE

2003 2007 2012

11

Euro area large and complex banking groups’ risk weights for corporate and retail credit exposures(percentages; maximum, minimum, interquartile distribution and median)

Sources: Individual institutions’ Pillar 3 reports and ECB calculations.

Supervisory fragmentation

12

Problems to be addressed

• Adverse loop between banks, public finances, macro performance

• Financial fragmentation• Fragmented and ineffective banking

supervision, national bias• Incoherent bank crisis management,

no transparent burden sharing

13

1. Single SupervisoryMechanism

(SSM)

3. Harmonised Deposit

Guarantee Schemes

(DGS)

Common rules (EBA Single Rulebook)

Common supervisory practices (SSM Supervisory Manual)

Banking Union

Banking Union: elements

2. Single ResolutionMechanism

(SRM)

3. Harmonised Deposit

Guarantee Schemes(DGS)

14

Geographical scopeSingle supervisor automatically includes all euro countries.

Right to enter for the “outs”

• Non-euro member states can join in “close cooperation” by: Adopting appropriate legislation and committing to abide to

any guidelines or requests by the ECB provide all information on its credit institutions that the ECB

may request

• The MS may ask the ECB to terminate the close cooperation after three years (it may reapply after further three years)

15

Functional scope All classic micro-prudential tools:• Authorisation of banking activity, mergers and acquisitions• Prudential requirements (own funds, large exposure limits, liquidity, leverage

and disclosure, internal governance and controls, “fit and proper”, …• Supervisory reviews, stress tests, additional prudential requirements

Macro-prudential tools:• National authorities remain competent for national macro-prudential

requirements (e.g. loan-to-value ratio). • For instruments in EU law (CR Directive), e.g. countercyclical and SIFI

buffers: national authorities have to notify the intended decision to the ECB ECB can apply more stringent macro-prudential measures

Other policy areas remain at national level (i.e. supervision over non-banks; anti-fraud; consumer protection)

16

Institutional scope

Significant credit institutions:

1) size: assets >30 bn; ratio assets/GDPexceeds 20% (but >5 bn)2) importance for the economy of theEU or any MS3) direct financial assistance from EFSFor ESM4) 3 largest banks in each country5) ECB decision

ECB supervision, with assistance ofnational authorities in the preparatory andimplementing activities.

National supervision with ECB controls

Less significant credit institutions

17

4 ECB representatives4 ECB representativesOne representatives of each national

banking authority fromparticipating MS

(non supervisory NCBs may attend)

One representatives of each national banking authority from

participating MS (non supervisory NCBs may attend)

Chair and

Vice Chair

Chair and

Vice Chair

Supervisory BoardSupervisory Board

ECB Governing Council(no objection)

ECB Governing Council(no objection)

Steering Committee (10 members)

Steering Committee (10 members)

If a non-euro country disagrees, and the GC confirms its objection. If the latter, the country may notify the ECB that it will not be bound by it.

The country may be expelled from the banking union.

Governance arrangements

18

• Supervision separate from monetary policy

• Independence

• Accountability

Key institutional features

19

Mapping of Euro Area Banking System

Legal issues relating to Framework

Regulation

“Supervisory Model” and “Supervisory

Manual”

Supervisory Reporting Issues - reporting

template

Comprehensive review

incl. a balance sheet assessment

Organogram and staff (about 800 people to start, plus support)

On-going preparatory work

20

• Why a crisis management framework: Prevents moral hazard Limits systemic risks

• EU “bail in” framework (creditor hierarchy)

• EU Bank resolution authorityOrderly bank failures Limits taxpayer exposure

• EU resolution framework (ex-ante and ex-post funding, backstop)

• Depositor protection (national, for now)

Crisis management framework

21

Conclusions

Opportunities:• Break bank-fiscal interactions• Break national supervisory silos, home biases• Reduce fragmentation, improve single market• Help stabilise the euro

Risks:• Weak crisis management framework • National influences may initially exert an excessive

influence on the system• Transitional risks, early mistakes, reputational loss

This project is funded by the European Union under the

7th Framework Programme (FP7-SSH/2007-2013) Grant Agreement n°320270

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www.syrtoproject.eu

This document reflects only the author’s views. The European Union is not liable for any use that may be made of the information contained therein.