Opinion

The ECB’s big moment

Europe’s banking union project has had many doubters since it started to be widely discussed in the spring of 2012. What is not in doubt, however, is its transformative nature.

By: Date: January 8, 2014 Topic: European Macroeconomics & Governance

Europe’s banking union project has had many doubters since it started to be widely discussed in the spring of 2012. What is not in doubt, however, is its transformative nature. In June 2012, EU leaders chose – in a galloping hurry, as usual – to move towards the centralization of bank supervision across eurozone countries, with this authority entrusted to the ECB. The consequences have only gradually become apparent to most and they represent both an opportunity and a risk.

The opportunity is to re-establish trust in European banks, reboot the pan-European interbank market, end dysfunctional credit allocation and start reversing the vicious circle between bank and sovereign credit. In an optimistic scenario, the ECB’s 12-month process of “comprehensive assessment,” including an asset quality review (AQR) and stress tests of around 130 credit institutions covering 85 per cent of the eurozone’s banking assets, will trigger triage, recapitalization and restructuring that financial history suggests is a prerequisite for systemic crisis resolution.

The risk is that, if the assessment fails to be consistent and rigorous, the ECB may find its reputation so damaged that the credibility of its monetary policy – and the perception of Europe’s ability to get anything done – could be affected. After all, this exercise is unprecedented in scale and scope, which means the ECB has little prior experience. At the same time, the political fallout is potentially poisonous in most of the states concerned.

Thus, much is at stake in next year’s balance sheet review, and the scene is set for an escalating confrontation between the ECB and member states in the months ahead. The ECB has pointedly made clear that it will form an independent judgment on the capital strength of the banks examined, without necessarily following the views of national supervisors.

It has also noted that the AQR can be expected to reveal significant new information – which, after all, is the whole point of it. A number of banks that, until now, had been deemed sound by national watchdogs may be found by the ECB to be undercapitalized, or even insolvent. In such cases, restructuring will inevitably be painful for the corresponding national governments, both politically and financially, leading them to plead for forbearance. The tension can be expected to generate more market volatility in Europe in 2014 than was seen in 2013.

A successful AQR and establishment of the Single Supervisory Mechanism (SSM) – EU jargon for the handover of supervisory authority to the ECB – would have structural consequences. Europe’s national and local governments often use their leverage over the publicly-regulated banking industry for industrial policy purposes, or to facilitate their own financing, a dynamic known to economists as financial repression.

Furthermore, the combination of national banking policy frameworks with the EU’s integrated single market has created powerful incentives for banking nationalism. It has led to the protection or promotion of domestic banking champions on the pan-European competitive field, both against competing foreign banks and potential new entrants and non-banks. This has often been detrimental to financial stability. The shift of supervisory authority to the ECB can be expected to gradually weaken these links and to hamper the ability of eurozone member states to engage in financial repression and banking nationalism. In particular, the “moral suasion” wielded by national authorities to persuade local banks to buy domestic sovereign bonds and ringfence funding across borders may become considerably less effective under the new regime of ECB supervision.

More generally, and even without rapid completion of a European resolution and deposit insurance framework, one can expect the centralization of bank supervision to foster market integration, cross-border bank consolidation and the emergence of a more diverse financial sector with a greater variety of banking and non-bank intermediation business models. If the transition is successful, then non-euro countries such as Denmark, Poland and even Sweden can be expected to join the SSM over a three-year horizon. This will not make the UK’s relationship with the rest of the EU simpler.

All this, of course, rests on the assumption that a credible AQR and well-handled bank restructuring will allow the ECB to establish itself as a sound, single eurozone banking supervisor. This cannot be taken for granted but appears more likely than not. Numerous and powerful interests may work against it, but an even stronger interest will probably prompt the eurozone’s leaders, starting with those of Germany, to do whatever it takes to help the ECB pass its make-or-break test.

This piece was first published in Financial World.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

View comments
Read about event

Past Event

Past Event

Climate change and the role of central banks

What connections exist between central banks and climate change, and what are the resulting implications?

Speakers: Emanuele Campiglio, Paul Hiebert, Pierre Monnin, Kjell G. Nyborg, Luiz Awazu Pereira da Silva, Mario Quagliariello, Mattia Romani, Paweł Samecki and Dirk Schoenmaker Topic: Energy & Climate, European Macroeconomics & Governance Location: Narodowy Bank Polski, Świętokrzyska 11/21, 00-919 Warsaw Date: September 16, 2019
Read article More on this topic More by this author

Opinion

Germany’s Divided Soul

Eastern Germans vote, think, and feel differently than western Germans do, as the results of the September 1 regional elections make clear. To help tackle the underlying economic causes of this divide, the federal government should introduce incentives to encourage foreign investment in the east of the country.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: September 13, 2019
Read article Download PDF

Policy Contribution

European Parliament

Hybrid and cybersecurity threats and the European Union’s financial system

The authors document the rise in hybrid threats and cyber attacks in the European Union. Exploring preparations to increase the resilience of the financial system they find that at the individual institutional level, significant measures have been taken, but the EU finance ministers should advance a broader political discussion on the integration of the EU security architecture applicable to the financial system.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance, European Parliament, Finance & Financial Regulation, Testimonies Date: September 12, 2019
Read article More on this topic More by this author

Opinion

Economic priorities for new EU leadership

Europe is no longer in crisis mode. However, it remains vulnerable; it is unprepared and it is procrastinating. Following European elections this May, new leaders are about to take their positions at the main European institutions for the next 5 years. They have the power in their hands to take action. But more importantly, they have the power to convene 28 states, which, if united, can play a significant global role. What are the urgent challenges that require collective European action?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: September 10, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Enhancing Europe's economic sovereignty

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Jean Pisani-Ferry on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Priorities for Europe's monetary union

Backstage at the Bruegel Annual Meetings, Nicholas Barrett talks with Zsolt Darvas on Europe's monetary union.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 5, 2019
Read article More on this topic More by this author

Podcast

Podcast

Backstage at BAM19: Which priorities for the new EU leadership?

Backstage at the Bruegel Annual Meetings, Rebecca Christie talks with Guntram Wolff on priorities for the new EU leadership, the Annual Meetings and Commissioner Malmstrom's keynote.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: September 4, 2019
Read about event

Past Event

Past Event

Bruegel Annual Meetings 2019

Bruegel's 2019 Annual Meetings will be held on 4-5 September and feature the launch of Bruegel's Memos to the New European Commission.

Speakers: Lorenzo Bini Smaghi, Georg Boettcher, Laurence Boone, Niels Brab, Claire Bury, Grégory Claeys, Vítor Constâncio, Zsolt Darvas, Kris Dekeyser, Jérôme Delpech, Maria Demertzis, Baroness Kishwer Falkner of Margravine, Ambroise Fayolle, Alicia García-Herrero, Mikaela Gavas, Sven Giegold, José Manuel González-Páramo, Pierre Heilbronn, Mathew Heim, Jamie Heywood, Yi Huang, Danuta Hübner, Korbinian Ibel, Shada Islam, Kate Kalutkiewicz, Brigitte Knopf, Jörg Kukies, Bernd Lange, Päivi Leino-Sandberg, Mark Leonard, Cecilia Malmström, Stefano Manservisi, J. Scott Marcus, Ann Mettler, Ashoka Mody, Reza Moghadam, Erik F. Nielsen, Jean Pisani-Ferry, Lapo Pistelli, Lucrezia Reichlin, Joakim Reiter, Victoria Roig, André Sapir, Harriet Sena Siaw-Boateng, Maria Spyraki, Philipp Steinberg, Matina Stevis-Gridneff, Alexander Stubb, Simone Tagliapietra, Jean-Claude Trichet, Laura Tyson, Nicolas Véron, Koen Vervaeke, Reinhilde Veugelers, Jasper Wesseling, Sabine Weyand, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Palais des Academies, Rue Ducale 1, 1000 Brussels Date: September 4, 2019
Read article Download PDF

Book/Special report

Braver, greener, fairer: Memos to the EU leadership 2019-2024

This collected volume, edited by Maria Demertzis and Guntram Wolff, focusing on the most important economic questions at EU level. The memos covering 16 different files and written by 21 Bruegel scholars, are intended to present the strategic to-do list based on an assessment of the state of affairs and the challenges that will greet the new Commissioners.

By: Maria Demertzis and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Dousing the Sovereignty Wildfire

In time, the current spat between French President Emmanuel Macron and his Brazilian counterpart Jair Bolsonaro regarding the Amazon rainforest may become a mere footnote. But other rows between collective and national interests are sure to erupt, and the world needs to find a way to manage them.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Retraites : pour la clarté

L’économiste regrette, dans sa chronique au "Monde", que les tensions internes au gouvernement aient conduit à s’écarter de la stricte logique d’un système par points.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: September 3, 2019
Read article More on this topic More by this author

Opinion

Why Europe needs a change of mind-set to fend off the risks of recession

Recession! This is the new worry in Europe and the US. A simple look at google trends shows that in Germany, France and the US, search interest for recession peaked in the last weeks. In Italy, the peak already occurred end of January. Whether a recession is actually occurring is difficult to gauge in real time. But there can be no doubt that significant risks such as the trade war and no-deal Brexit exist.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 2, 2019
Load more posts