The Institute of International and European Affairs is holding a one-day conference today to examine the future of the financial services sector and banking in Europe. IIEA director general Tom Arnold said the conference is taking place at a critical juncture, ahead of the crucial European Council meeting on the Single Resolution Mechanism later this month.

Vítor Constancio ECB

Vítor Constancio’s speech on European banking

“As we are a bank-based economy, there are few issues that are more vital to growth and job creation in the euro area than a well-supervised and stable banking sector. In passing this responsibility to the European level, we are therefore taking a major step towards common ownership of our economic outcomes,” said ECB vice-president Vítor Constancio in his speech on “The Future of Banking in Europe” at the conference.

Vítor Constancio’s speech focused on the impact the Single Supervisory Mechanism (SSM) will have on European banking, and how the resulting changes would affect the preponderance of bank-based intermediation in European economies.

European banking union

Just to recapitulate, the concept of the European Banking Union rests on three pillars (i) the Single Supervisory Mechanism (SSM); (ii) the Single Resolution Mechanism (SRM); and (iii) a common system of deposit protection. The SSM is expected to be a strong and independent “supranational supervisor,” a body composed of representatives from the ECB as well as national competent authorities from the euro area. The SRM is a framework for resolving failing banks swiftly and impartially. The third is an introduction of harmonized depositor preference for eligible deposits in the EU.

Benefits of the SSM

Vítor Constancio elaborated on the ramifications of the SSM on banking in Europe, highlighting six benefits:

  • Implementation of “the most advanced supervision of banks.”
  • Homogeneity in the manner of calculation of risk-weighted assets.
  • Harmonized treatment of non-performing exposures and provisioning rules.
  • Creation of conditions for further integration of the European banking system.
  • Catalyze a period of restructuring in European banking through M&A.
  • Change in “macro-prudential” policy-making through new instruments and decision-making.

Impact on banking intermediation

These structural changes in the banking system would permanently affect the rather high level of bank-based intermediation in the euro area – note the relatively large size of the euro area banking sector compared with the US – estimated at 270% and 72% of GDP, respectively.

“Overall, I expect the future of banking to involve some rebalancing away from such high levels of bank-based intermediation and towards more capital market-based intermediation,” said Constâncio.

This could result in the deepening of corporate bond and equity markets, securitization and easier financing of long-term infrastructure financing.

Constâncio’s ultimate vision for the European banking union is the development of a “real EMU – that is a union where banking, fiscal, economic issues are decided in common, backed by the democratic mandate of the people of Europe.”