Op-ed for Handelsblatt Newspaper ‘Key priorities for a resilient Εuropean banking system’ by the Governor of the Bank of Greece Yannis Stournaras
27/11/2020 - Articles & Interviews
The COVID-19 pandemic has, once again, brought to the fore the need for a more resilient European banking sector. This calls for the completion of the banking union. In this direction, I would like to highlight key priorities.
First, we need to strengthen our crisis management framework. The Bank Recovery and Resolution Directive (BRRD) can address the failing of single banks but cannot address systemic crises where country- (or even countries-) wide financial stability is at risk. In exceptional cases, I support the introduction of a more flexible stance on State Aid. The setting up of state-guaranteed Asset Management Companies, with appropriate remuneration of the state, should be recognised as a valid answer to address asset quality issues outside resolution.
Moreover, the BRRD offers no clear strategy for dealing with the failure of small and mid-sized banks that are primarily deposit-funded and cannot issue sufficient amounts of subordinated securities to be bailed-in. Such banks may be left only with a solution of liquidation along national insolvency regimes. The fragmented nature of these regimes means that banks from different EU member states are handled in different ways with varying hierarchies of creditors (bond holders, depositors, etc.).
Some harmonization of the different national liquidation procedures is warranted. A key area is creditor hierarchies. I believe that, for financial-stability reasons, all deposits should be excluded from the instruments that absorb capital losses. The relevant BRRD provision should be revisited.
Second, a solution for the provision of liquidity in resolution is critical. To this end, a priority is to operationalise the ESM backstop to the Single Resolution Fund (SRF) and move forward with its early introduction. Still, liquidity needs in resolution may easily surpass what is currently provided for. I see a role for the ECB in this area. Drawing from the experience of the Bank of England, the establishment of a special credit line by the ECB could be considered, subject to appropriate safeguards.
Third, it is crucial to progress with the missing piece of our Banking Union, namely the European Deposit Insurance Scheme (EDIS). The development of a single, well-designed and adequately funded deposit insurance system would provide confidence among depositors across Europe, reducing the likelihood of bank runs and effectively severing the bank-sovereign nexus. Greater political ambition is needed in this direction.
During the Great Depression, the U.S. banking system was on the verge of collapse; one-third of the banks had closed in the early-1930s. Upon assuming the Presidency in March 1933, Franklin Roosevelt declared a bank holiday. Upon reopening the banks a week later, he announced creation of national deposit insurance and enhanced liquidity provision for banks. That announcement brought both the banking crisis and the Great Depression to an end. The vaccine for a healthier Europe is a complete, solid banking union.
You may find here the published article in Handelsblatt.