Prospects of the banking union and financial integration in the European Union were addressed at the third session of the Interparliamentary Conference on Financial and Economic Governance of the EU.

André Sapir, Professor at the Université libre de Bruxelles and Senior Fellow at Bruegel, emphasised that the decision to set up a banking union should be a decisive step to ensure that Europe was equipped with the right institutional framework to have both financial integration and financial stability; a few options on how to do that were discussed: “My preference would have been for the creation of the banking union that includes all EU Member States, a banking union for the single market. In a sense, there was a clear logic in doing that. Another logic could have been to create a banking union only for those countries that belong to the euro area because those countries after all share the same lender of last resort to their banks: the ECB.” Professor Sapir argued that the solution that was adopted was a hybrid one: a banking union to which all euro area countries must belong and other EU countries can belong if they choose so. When speaking about the Single Supervisory Mechanism Mr Sapir expressed his view that before banks were allowed to join the mechanism, asset quality review and stress tests should be carried out.

The Professor also believes that timing for all reforms is paramount and the first step must be to reform the banking system: “The banks have to become more European. A genuine banking union is simply not compatible with the way we have been doing business so far.”

According to Erkki Liikanen, Governor of the Bank of Finland and Member of the Governing Council of the European Central Bank, the Single Supervisory Mechanism should be supplemented with a bank recovery and resolution mechanism. The Resolution Authority granted with a certain narrow mandate should be able to resolve inefficient banks at the lowest possible cost.

He noted that the Euro Area Summit in 2012 came to a conclusion that in order to safeguard the single market and the single currency and to reduce the risk of future financial instability it was necessary to establish a banking union. “It is imperative to break the vicious circle between banks and sovereigns. The key question is that we not only have the same rules, but that we also implement the same rules in the same way in all Member States. This is crucial and must not be compromised. All banks must be supervised according to same practices in all euro area countries,” Mr Liikanen said. He believes that the Single Supervisory Mechanism allows the ECB to require the competent authorities to carry out comprehensive assessments on banks, including the balance sheet assessment, which is a necessary step before the Single Supervisory Mechanism starts to operate effectively.

This view was supported by Vitas Vasiliauskas, Chairman of the Board of the Bank of Lithuania: “After the final adoption, sound implementation of the Single Supervisory Mechanism is the next key challenge both for the ECB and national supervisors. In particular, high expectations have been raised about the comprehensive assessment of the major European banks. It will cover around 85 per cent of bank assets in the euro area alone and encompass risk assessment, balance sheet assessment and forward-looking stress tests.”

According to Mr Vasiliauskas, comprehensive assessment offers an opportunity to strengthen confidence in the European banking system, but a lot will depend on how possible shortages, if and when identified, will be dealt with.

Mr Vasiliauskas noted that the main innovation, the bail-in tool, will allow using private funds to rescue the failing banks and to protect the public funds when he spoke about the Directive on Bank Recovery and Resolution. Key elements of the banking union such as independent supervision, effective resolution and credible deposit insurance scheme, can help Europe recover financially. However a sound macro-prudential regulation explicitly targeted at preventing the building up of risks is also needed.

Saulė Eglė Trembo, Public Relations Unit, tel. +370 5 239 6203, e-mail: [email protected]