IEP Lunch Debate with Jörg Asmussen
The lecture “The European Central Bank, the banking union and the stabilisation of the euro zone” by Jörg Asmussen, then member of the ECB Executive Board and former state secretary in the Federal Ministry of Finance, on 4 November 2013, focused on the requirements of a future banking union in conjunction with a fiscal union.
According to Asmussen, the crisis that Europe is currently undergoing has highlighted the lack of a comprehensive European approach. The path to a common financial market policy with a banking union is mapped out and necessary. Regarding the lessons, Europe can take the U.S. as example, where there exists a private alongside a public banking union. In the U.S., challenges in the banking sector are not treated at member state level as in Europe but rather, thanks to federal structures, by the Federal Deposit Insurance Corporation (FDIC). Asmussen raised the question how the federal state of New York’s financial situation might look today if it would have had to raise the guarantees and payments to save, for instance, Citibank on its own. How would the market have reacted and rated the creditworthiness of the bank as well as the state? Therefore, structures similar to those in the U.S. should be established in Europe. A European banking union could also help to pass on the ECB’s low interest rates to the member states that need them, thus having a positive effect on the euro and the internal market.
A banking union, Asmussen explained, consists of two essential elements: a common mechanism to supervise banks and a common mechanism to resolve banks. The former will be fully operational in the autumn of 2014 with the SSM (Single Supervisory Mechanism). Since the reputation risk of the SSM is with the ECB, the ECB is scrutinizing the banks’ books very thoroughly. Unfortunately, the previous stress tests have not led to new trust in the European banking sector; the third and last stress test, whose results will be published in autumn 2014, must help remove the existing uncertainties.
The second indispensable element of a banking union is set to enter into force in 2015 with the Single Resolution Mechanism (CSRM). With this mechanism, banks in the internal market are to be resolved across borders and without causing shock waves in the financial market. This could minimize the possible risks for the tax payer. The crisis and particularly the measures to save Hypo Real Estate have shown that coordination between the member states is not sufficient. A resolution requires three elements:
- A valid legislative framework that establishes a European regulation for the resolution of banks and finally clarifies the order in which creditors must assume liability (this legislative framework already exists with the Bank Recovery and Resolution Directive (BRRD)),
- the creation of an independent and capable European resolution authority, ideally becoming operational by the beginning 2015,
- as well as the creation of a European resolution fund financed by the banks.
Alongside the public banking union there is also a private banking union in the U.S., which encompasses banks and capital markets. According to scientific studies, this private banking union was able to absorb two thirds of all external shocks. Furthermore, banks in the U.S. do not limit themselves to individual federal states but rather operate across borders, while many European banks focus their activities above all on their respective home states. The European capital markets are not integrated either. In France and Germany, for instance, 85% of share capital is held nationally. Consequently, there is no absorption in case of national imbalances. By contrast, transnational activities could lead to a diversification of risk and strongly integrated financial markets could help with the resolution of banks. Asmussen also raised the question whether an EU budget or even a euro zone budget could help to absorb business cycle fluctuations. Although the absorption provided by national budgets is sufficient in normal times, it is insufficient in times of crisis, as the example of Ireland has shown. Regarding the future resolution mechanism, Asmussen emphasized that, thereby, the costs are distributed among the banks’ creditors and owners, the need for rescue by national budgets lowered and thus the taxpayers’ money spared. The banking union, therefore, can contribute to a stabilization of the financial union. Furthermore, analogous to the U.S., where the Treasury extends a permanent credit line to the FDIC, the ESM could provide the means for a resolution fund. This would require changing the ESM-Treaty but not revising the EU-Treaties. Finally, Asmussen advocated harmonizing tax regimes in Europe. Since enterprises are migrating to other European countries in order to maximize their net profit, there must be, for instance, a minimum corporate tax rate across Europe.
In summary, Asmussen underlined the necessity of creating of a banking union. Such a union reduces the need of stabilization at EU level and is in the interest of the EU as well as Germany. The necessary decisions must be reached as soon as possible so that a European resolution mechanism is operational alongside the Single Supervisory Mechanism (SSM). A banking union is open for other states beyond the euro zone. However, states such as Great Britain that do not wish to further integrate should not obstruct willing states.
By Jéronimo Barbin
