“The Time has Come for More Integration”

SAFE Policy Lecture: Pentti Hakkarainen talks about the future of the Banking Union

A monetary union without a common banking policy is incomplete. This assessment dawned upon European policy makers as the Great Financial Crisis morphed into the European sovereign debt crisis. It took however the near-unraveling of the Eurozone in 2012 before the banking union concept became politically acceptable. Since November 2014 the Eurozone’s largest banks are now supervised by a common institution, the Single Supervisory Mechanism (SSM) of the European Central Bank (ECB). What has been achieved so far? And what are the challenges for the future? Pentti Hakkareinen, Member of the Supervisory Board of the SSM and representing the ECB in the authority, talked about prospects for integration and further consolidation of the banking union at a SAFE Policy Lecture on 19 June at the House of Finance.

Hakkarainen explained the two key objectives of the European Banking Supervision. Firstly, he said that the SSM aimed for financial stability. “Therefore, a tough and forward-looking supervision of credit institutions is needed,” said Hakkarainen. He pointed out that for that purpose, an identification of relevant risks, a fair and consistent assessment of risks and a timely and tough intervention are crucial to this end if deficiencies are identified. Secondly, a key objective of the European Banking Supervision is further financial integration with the goal of creating a supervisory level playing field for banks. For the equal treatment of credit institutions, according to Hakkarainen, it is decisive to apply the supervisory framework across all participating countries, to develop harmonized supervisory methodologies and standards, and to assure the quality and benchmark the supervisory practices to identify best practices and areas for improvement.

EDIS: Align liability and control

He pointed out that the European Banking Supervision is one of the largest banking supervisions in the world: Currently, 126 banking groups in 19 countries are under direct supervision of the ECB, around 3.500 smaller institutions are directly supervised by the national competent authorities. He called for the establishment of the European Deposit Insurance Scheme (EDIS) to complete the banking union. “It will help share risks more efficiently across the euro area, after a parallel risk reduction”, he said. Hakkarainen explained that EDIS would also align liability and control between the national and the European level. He is convinced that once the banking union is complete, the euro area would become even more of a single jurisdiction. “This will make it easier for banks to do business across borders, and for the sector to consolidate”, Hakkarainen said.

With a couple of indicators such as a declining non-performing loans ratio, the evolution of Common Equity Tier 1 capital (CET1) or a higher net stable funding ratio Hakkarainen backed his argument that the European banking sector at the end of 2017 was in a better shape than 2014. Still, he said that banks needed to address profitability by adapting business models while increasing revenues and cutting costs. “At the same time, they need to maintain and develop risk management and continue strengthening governance,” he said. Also Hakkarainen said that banks should clean up balance sheets and reduce the level of non-performing-loans. In his view, important factors in progress of the banking union are institutional development, technological development as a facilitator and market conditions that support consolidation. “This means the time has come for a period of higher integration, and this is good for the economy and the society,” he said.