Building the European Banking Union in Times of Crisis - Ignazio Angeloni - June 25 2013 - First International Conference on Syrto Project

1. Building the European
Banking Union in
Times of Crisis
SYstemic Risk TOmography:
Signals, Measurements, Transmission Channels,
and Policy Interventions
Ignazio Angeloni
European Central Bank
Brescia, 25 June 2013

2. 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. 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. 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. 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. Claims
and liabilities (including that of the ECB) add up to zero.

6. 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. 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
BankCDS
Sovereign CDS
euro area
United States

8. 8
8
Bank loans to non-financial corporations
(percentage change per annum)
Source: ECB.
Short-term interest rates on small
loans (up to €1mn) to non-financial corporations
(percentages per annum; rates on new business)
Source: ECB. Source: ECB.
National boom-bust cycles

9. 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. 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. 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. 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. 13
1. Single
Supervisory
Mechanism
(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
Resolution
Mechanism
(SRM)
3. Harmonised
Deposit
Guarantee
Schemes
(DGS)

14. 14
Geographical scope
Single 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. 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. 16
Institutional scope
Significant credit institutions:
1) size: assets >30 bn; ratio assets/GDP
exceeds 20% (but >5 bn)
2) importance for the economy of the
EU or any MS
3) direct financial assistance from EFSF
or ESM
4) 3 largest banks in each country
5) ECB decision
ECB supervision, with assistance of
national authorities in the preparatory and
implementing activities.
National supervision
with ECB controls
Less significant
credit institutions

17. 17
4 ECB representatives4 ECB representatives
One representatives of each national
banking authority from
participating 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. 18
• Supervision separate
from monetary policy
• Independence
• Accountability
Key institutional features

19. 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. 20
• Why a crisis management framework:
 Prevents moral hazard
 Limits systemic risks
• EU “bail in” framework (creditor hierarchy)
• EU Bank resolution authority
 Orderly bank failures
 Limits taxpayer exposure
• EU resolution framework (ex-ante and ex-
post funding, backstop)
• Depositor protection (national, for now)
Crisis management framework

21. 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

22. 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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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.