For Daniel C. Hardy there is no doubt that the European banking union is an "enormous achievement" although it may be a complicated construct and still has vulnerabilities to overcome. The Division Chief in the Monetary and Capital Market Department of the International Monetary Fund (IMF) talked about possible improvements of the banking union in a SAFE Policy Lecture on 5 November in the House of Finance. The background of his lecture was the recently completed Financial Sector Assessment Program (FSAP) for the euro area of the IMF, which Hardy led.
The program assessed not only the financial sector’s stability but also development aspects of markets, institutions, and infrastructure. According to Hardy, it is the first one of the IMF that focused on the euro area and resulted in recommendations on supervision and regulation for a stable banking union.
Overall, Hardy sees "great progress in many areas". However, in his view, the vulnerabilities in the euro area are unevenly distributed and fragmentation remains. Therefore, it is even more important to analyze intensively what can be done to strengthen the euro area. "When a crisis happens, it is to some extend a revelation of losses and errors in the past," he explained the importance of the FSAP. With the stress test of 29 significant institutions in the euro area and other tools of the program, a better crisis management can be achieved which will reduce risks and costs, Hardy said. He called for coherent rules in supervising and regulation. However, there is a delicate balance between rules and discretion and between harmonized and tailored solutions.
Vulnerabilities that influence the stability of the euro area may be slower growth in Europe and elsewhere, Brexit and cyber-risks, said Hardy. However, the possible impact of these issues varies between the euro countries.
Close legal and regulatory gaps
Looking at banking regulation, Hardy acknowledged impressive achievements by the Single Supervisory Mechanism (SSM). The supervision approach is in his view consistent and intrusive and there is good progress on risk assessment. However, he pointed out some issues. He suggested to develop better planning of supervisory resources and to reduce the fragmentation of national legal frameworks. Decision-making becomes difficult and uncertain because of the various powers of supervision, which diverge on the national levels. He suggested to close legal and regulatory gaps and to converge with international standards. He also said that the coordination and information sharing with the Single Resolution Board (SRB) and anti-money laundering supervisory authorities should be improved.
In this context, he addressed that supervisors may need more competencies in terms of bank-like activities as business models change and the role of non-banks is continuously growing. He showed that the importance of non-bank financial institutions has been rising since 2009. Hardy further explained what lessons on crisis management and the Single Resolution Mechanism (SRM) can be learned from the bail-out cases of banks. He pointed out the importance of aligned conditions of resolution: "Because of different criteria, you don’t know what will happen," he explained. In Hardy´s view, the rules for taking action are still too complicated.
