With the Banking Union project, which was launched in 2014, the European Commission has set the goal of stabilizing the financial sector and economic growth in Europe. Since then, the quality of banking supervision, as one of the central pillars of the Banking Union, has improved significantly, giving rise to hopes that the acute crisis triggered by the corona pandemic can be overcome. This point was made clear by SAFE Senior Policy Fellow Ignazio Angeloni at the second joint policy webinar of SAFE and the London-based Centre for Economic Policy Research (CEPR) entitled "Beyond the Pandemic: Reviving Europe's Banking Union".
"The Banking Union has worked, it is successful", Angeloni clarified at the beginning of the webinar, in which Elga Bartsch, Head of Economic and Markets Research of the Blackrock Investment Institute, Mathias Dewatripont from the Université libre de Bruxelles, and SAFE's Scientific Director Jan Pieter Krahnen took part. According to Angeloni, although the individual measures within the framework of the Banking Union have not yet been fully implemented, the success of the project is particularly noticeable with regard to the increasing security and stability of banks in Europe – at least, until the beginning of the corona crisis. This significant progress was accompanied by greater transparency and accountability of the financial institutions as a result of the supervisory regulations.
Sovereigns and banks are interdependent
However, Angeloni sees little or no progress made so far towards increasing efficiency, competition among European banks, and promoting banking integration. The relationship between sovereigns and banks is also still characterized by a doom loop: "Sovereigns depend on banks and vice versa ", Angeloni said. As of today, both sovereigns and banks are more stable. The solvency on both sides had improved so much since the existence of the banking union until the corona crisis that the European Central Bank did not have to resort to its macro-prudential toolbox. Nevertheless, Angeloni believes there is more to do.
"We should reduce overbanking, especially among the weaker players, and at the same time promote cross-border diversification of state portfolios to make the stronger players in the market more efficient," the economist said. If capital shortages were to occur now as a result of the corona crisis, the Banking Union would set the framework to ensure that the market did not fail. Possible prudential policies would include public guarantees from the national to the European level as well as direct subsidies and nationalizations.
The Single Resolution Mechanism determines the banking union's credibility
During the discussion, Elga Bartsch stressed that the unification of the European financial system could help to cushion both symmetric and asymmetric shocks. To put such a system into practice, "the completion of the banking and capital market union is of crucial importance", said Bartsch. As joint European projects, both served to share risks between countries, sectors, and jurisdictions.
Jan Pieter Krahnen objected that the liquidation of illiquid banks, as provided for in the agreement, "is crucial for the credibility of the banking union as a whole". Therefore, bail-in is essential, he said. However, in order to solve the acute crisis technically, equity-like rather than debt-based rescue programs could relieve the banking sector.
Depending on the severity of the corona crisis, however, recapitalization measures initiated by the sovereign could become necessary, explained Mathias Dewatripont. The current situation can best be summed up in terms of crisis management scenarios: "Bail-in is not in, bail-out is not out."