17 Apr 2015
Banking union – State of the Art
“The introduction of a banking union was a step that revolutionized European economic reality to a greater extent than economic and monetary union did” – said Andrzej Reich from the Polish Financial Supervisory Authority, who was the keynote speaker during the 137th mBank-CASE Seminar “Banking union – State of the Art”, which took place on April 9, 2015. Officially, the banking union came into force on November 4, 2015. The idea was conceived in June 2012 during a European Union summit held in Brussels. Yet it is assumed that it was created much earlier, at the turn of the 1990s, when the regulations concerning the so-called “single passport” were adopted. According to this solution, “banks which were legally established in one Member State were allowed to establish/provide their services in the other Member States without further authorization requirements” (this definition can be found on the European Commission’s website). It really was a breakthrough: for the first time in history banks’ operations and their supervision were conducted on two different levels, in the home country and in the hosting country. The result was a so-called “divisionalisation”, which means that business and legal areas were separated. In other words, the subsidiary bank was legally an independent entity supervised by the authorities of the hosting country. However, from the business point of view, it was still a branch of the parent company.
In Andrzej Reich’s view, this situation implied the endangerment of banks and domestic financial systems’ safety. In 2013, the Committee of European Banking Supervisors (CEBS) made an attempt to solve the problem and adopted a legislative package known as “CRD IV” comprising a directive and resolutions that are legally-binding in all Member States without the necessity to transpose them into national legislative systems. The purpose of this package is to harmonize the legislation of EU Member States in the field of supervision (it was supposed to be the first step towards the integration of the European banking industry). Some people claim that this document is an element of the banking union, but Mr. Reich considered this opinion flawed, because these regulations apply to all EU Member States. The integration of the banking sector, however, is a process that only the countries belonging to the Eurozone participate in (countries that have not adopted the Euro as their national currency can be a part of it only on the basis of “close cooperation”). The banking union consists of three elements: Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM) and Deposit Insurance Scheme (currently, only the SSM is fully operational). Where does the whole idea come from? “As I mentioned, it was created as a consequence of the financial crisis in Ireland and of the need to capitalize Spanish banks. Experts and incumbents were looking for a solution that would both legitimize transferring money directly to banks (until then, it was being given to governments, which increased public debt) and would not lead to losing control over the aid. It turned out banking union was the solution” – explained A. Reich. 
According to Stafan Kawalec, President of Capital Strategy, who commented on the presentation of the keynote speaker, the launch of the banking union is another stage of harmonization of the banking sector’s legislation. In other words, it is simply its integration. He also pointed out that because of the financial crisis, the rationale for the union’s creation was recently called into question. First, there is a statement according to which the size of the financial sector has a positive correlation with the economic development. Yet, as states the International Monetary Fund, the increase in credit action has a positive impact on the economy only when the share of credit is relatively low. As prof. Pagano shows in his report „Is Europe overbanked?” (which was presented during the 132nd mBank-CASE Seminar), the value of this index is too high in the European Union. Worse, there are many “Too Big To Fail” banks which, if they go bust, may shake the financial system’s stability. According to the next argument, EU membership will provide the accessing country with a safe and almost unlimited access to European savings (without any currency risk). It was often said that current account deficits between somecountries do not matter. The last crisis proved this opinion wrong: current account deficits significantly impede economies’ competitiveness. Experts used to point out that financial markets’ integration within the EU and the Eurozone would accelerate the convergence, as cross-border banks were supposed to invest their capital in the most effective economies. This scenario turned out to be far from reality. The credit action indeed increased, but the money did neither go to the production sector nor to households and caused even bigger divisions – Kawalec explained.
Prof. Leszek Pawłowicz, Vice-president of the Management Board, of the Gdansk Institute for Market Economics and Director of the Gdansk Academy of Banking, delivered the second commentary, sharing his skepticism about the banking union. He explained that joining the union does not, as the common opinion says, involve participation in the European Financial Stability Facility fund (only the Union’s member states are obliged to take part in it). In this case, countries pay only to the structuring fund which budget is very limited. During the lively debate that ensued after the presentations, the participants to the seminar asked about the perspectives of a Polish membership in the banking union: its benefits and the possible risks for our country. We invite you to watch the entire Seminar online on bankier.tv.
