24 Oct 2024

“It’s a bad idea to wait for the next crisis”

In a SAFE Policy Debate, economist Nicolas Véron and Elke König, former Chair of the SRB, call for market forces to actively take part in completing the European Banking Union

Jan Pieter Krahnen, Nicolas Véron, Elke König and Florian Heider during the Policy Debate

Ten years after the empowerment of the European Central Bank (ECB) as banking supervisor, the European Banking Union remains an unfinished project. Accompanying the release of his book “Europe’s banking union at ten: unfinished yet transformative”,Nicolas Véron from the Brussels-based economic think tank Bruegel and the Peterson Institute for International Economics in Washington DCtook part in a policy debate with SAFE Senior Fellow Elke König, hosted by the SAFE Policy Center. The event was moderated by Senior Fellow Jan Pieter Krahnen, SAFE’s Scientific Director Florian Heider gave an introduction.

Nicolas Véron traces the steps from the first notions of a centralized banking union back in 1973, until the decision to implement the union, taken during the European Debt Crisis in 2012, in order to break the “vicious cycle” between sovereign risk and banking risk. While Véron concedes that the Single Supervisory Mechanism (SSM) is complete, he argues, that the cycle still remains unbroken and that “supervision is not enough”. Citing instances of large-scale reform like the introduction of the euro, he calls for regulatory treatment of sovereign exposure and deposit insurance now: “It’s a bad idea to wait for the next crisis,” he explains.

“We must look for another idea, to make progress on a banking union”

Elke König does not consider sovereign bonds as a current core factor. She argues that they were never on the agenda of the SSM, and that even recent interest risk concerns and bank resolutions in 2023 did not trigger a crisis. While the foundation of the Single Resolution Board (SRB) as the institutional hub of the SSM was an achievement, according to König, it lacks independence to function properly. The SRB was built as an additional layer on top of the national institutions. This contrasts with the US Federal Deposit Insurance Corporation, which König views as a as a role model for the SRB.

Currently, König sees a European deposit insurance scheme (EDIS) as unlikely. She believes that other ideas are needed to move the banking union forward: “I think, capital market integration looks more promising.” She recognizes that pan-European takeovers are often hindered for political reasons and argues for European banks with financial power: “We need strong European banks for a functioning capital market union.”

Both König and Véron agree that simply waiting for the next crisis as catalyst for reform is not an option. Citing the current possibility of a Commerzbank takeover by the Italian UniCredit Group, both view market forces as viable options towards the next step on the road to a European Banking Union.