Publication by BNB Deputy Governor in charge of the Issue Department Mr. Kalin Hristov published in ‘Views. The EUROFI Magazine’ disseminated during ‘The Eurofi High Level Seminar 2018’ held in Sofia, 25 - 27 April 2018
WHY THE BANKING UNION IS NOT A
REASONABLE OPTION FOR NON-EURO AREA COUNTRIES?
The creation of the Banking Union was a response to the banking and sovereign crisis in the euro area. While impossible to prevent occurrences of future banking crises, a well-designed Banking Union should minimise their likelihood or their systemic impact for the EU banking systems.
The Banking Union was launched in the euro area but, being based on EU law and needing to respect the integrity of the Single Market, was left open for participation of the non-euro area Member States. The latter, however, have so far shown no interest. A summary of reasons explains why.
A primary objective of the Banking Union was to intensify integration of banking supervision and thus reduce market fragmentation. Another key motivation was to ensure more efficient supervision at the national level, unimpeded by non-prudential considerations stemming from industry pressure on domestic supervisors.
However, these expected merits of the Banking Union invoke different perspectives from the non-euro Member States.
First, a degree of market fragmentation/differentiation may be ‘healthy’. Such differentiation, among other things, reflects risks associated with a particular national economy or banking system. Country-specific risks always remain. They need to be differentiated, not blurred, to let market forces play their disciplining role.
Second, the argument against regulatory capture can also extend to a unified supervision. Whereas a banking entity of only domestic significance may hardly influence a supranational supervisory authority, this may not be the case with big cross-border banks.
In addition, there are clear disincentives embodied in the ‘close cooperation’, the mechanism devised for Member States whose currency is not the euro to join the Single Supervisory Mechanism.
A country with ‘close cooperation’ will face hugely asymmetric treatment:
• It will remain excluded from the ultimate decision-making on supervisory issues in the ECB Governing Council.
• The supervisory decisions of the ECB, which are not legally binding outside the euro area, will have to be replicated by acts of the domestic supervisor. The latter will be held responsible and liable in case of disputes.
• It will remain without access to ECB liquidity assistance.
• It will have no access to the ESM as a potential source of funds for direct or indirect bank recapitalisations.
The asymmetries and inequalities between euro area and non-euro area Member States are further exacerbated in the Single Resolution Mechanism, which is automatically joined if a country joins the Single Supervisory Mechanism with ‘close cooperation’.
The above provides reasons why it is risky to join the Banking Union with ‘close cooperation’ before becoming a member of the euro area.