Towards a Banking Union - Panel I: Are growth and stability compatible? -

1. Towards a Banking Union- Panel I: Are growth and stability compatible? - Steven KeuningDirector General HR, Budget and Organisation 20 March 2013

2. Outline • Relevant to EU/EMU: compatibility of growth, financial stability… and financial integration • Supervisory lessons from the financial crisis • Rationale for Single Supervisory Mechanism (SSM) • State-of-play to establish the SSM • SSM: Guiding Principles • SSM: Key Success Factors • SSM: Challenges & Opportunities • (SSM)

3. Relevant to EU/EMU: compatibility of growth, financial stability … and financial integration • Financial integration implies: • Cheaper and easier cross-border payments • Larger variety of financial products available at lower cost (loans) or higher remuneration (e.g. internet deposit accounts) • More buyers and sellers on larger financial markets • Enhanced transmission of monetary policy decisions • Yet: possibly also more cross-country distress contagion and larger impact of excessive risk-taking  strengthening European supervision

4. Supervisory lessons from the financial crisis • Willingness to actin a timely and adequately strict fashion • Need to test resilience to (truly) adverse stress test scenarios • Need for independent supervision, avoiding local ‘capture’ • Strongerrisk-based capital and liquidity requirements • More focus on verification and monitoring of compliance with best risk management and internal control practices • Cross-border dimension is crucial • Minimisation of home-host conflicts of interest (in a crisis) • Harmonisation of risk and asset quality assessment • Stronger interplay between micro- and macro-prudential supervision (early macro-warnings, spotting contagion risks)

5. Rationale for Single Supervisory Mechanism Single Supervisory Mechanism (SSM) essential to: • Promote sustainable growth through financial integration while containing financial instability (e.g. cross-border contagion) • ImproveEMU functioning: smooth monetary policy transmission and functioning of money markets; containing imbalances • Helpbreaking negative feedback loops between governments and banks (together with the Single Resolution Mechanism) • Remove any national biasof national supervisory authorities • Converge to the best (of the national) supervisory practices • Substantially reduce the supervisory ‘burden’ for cross-border banks (through the Single SSM Supervisory Manual) • Reduce (crisis) coordination failures among national supervisors • Promote reinforced coordination by European Banking Authority

6. State-of-play to establish the SSM • 13 December 2012: ECOFIN Agreement on SSM Regulation • Trilogue with the European Parliament (including the EBA regulation) expected to be concluded in a few weeks • Adoption of the SSM Regulation by the Council and Parliament in early summer, with a possible publication and entry into force in the course of July • ECB decisions on SSM (organisation, staffing, location, recruitment) only after entry into force of SSM Regulation; preparation started • SSM begins supervision one year after entry into force

7. SSM: Guiding Principles • Effective single supervisory authority within the ECB (including macro-prudential powers, legal competence for all credit institutions) • Independent and accountable • Separationbetween ECB’s supervision and monetary policy responsibilities (e.g. decision-making by Supervisory Board) • Establishment as a System, with participation of National Competent Authorities (NCAs), and not a ‘college’ of NCAs • Leverage NCAs expertise (convergence towards the best national practices, ECB to directly supervise only (about 140) systemic banks) • Financing by supervised entities (level playing field across SSM)

8. SSM: Key Success Factors • Ensure full and smooth cooperation between ECB and NCAs (Joint supervisory teams; strong horizontal functions) • Homogeneous approach to risk and asset quality assessment and supervisory requirements (e.g. Single SSM Supervisory Manual, reporting) • Strong on- and off-site supervision • Effective workflow management and well-functioning IT-systems • Smooth management of the transition period

9. SSM: Challenges & Opportunities • Time (only 18 months to set up SSM versus 4 years to set up ECB) • All SSM institutions’ alignment towards a truly European system, with effective reporting lines and commitment of resources • Utilise national experience and skills, while developing the ECB’s horizontal and specialised expertise (e.g. risks’ assessment) • Unlike monetary policy, there is no well-defined single overall objective; more visibility of ECB towards national public opinion • Reap synergiesbetween ECB’s ‘central banking’ functions (analytical capacity) and its macro- and micro-prudential supervision tasks • Staff recruitment, (regular) relocation (language issues?), training • A smooth, yet rapid transition (continuity without entrenching national approaches; balance sheet assessment) • Unified supervision needs a common resolution mechanism

10. Towards a Banking Union- Panel I: Are growth and stability compatible? - Steven KeuningDirector General HR, Budget and Organisation 20 March 2013