Low Growth

Sustained low growth in the EU will make emergence from the financial crisis and the construction of a framework for financial sector management much more difficult. Past financial crises have been resolved to a considerable extent by the resumption of strong growth, often external, that drove down debt ratios and enabled affected countries to emerge from austerity programs before austerity fatigue had set in too heavily. Thus, 1984 was an annus mirabilis as the “Reagan boom” and parallel growth elsewhere started lifting Latin American economies out of their crisis-level indebtedness, although the debt reductions of the Brady Plan in 1989 were still needed to properly resolve it. In addition, the widespread growth spurt of the early years of this century enabled Asian countries, which had recently been in deep financial crisis, to grow at rates of 6 percent or more; this growth rapidly brought down high debt ratios and enabled the countries to wind down their emergency infrastructures and arrangements. They were able within a few years to close their restructuring agencies and decline follow-on IMF programs, and in some cases even prepay their IMF borrowing.

Growth prospects for Europe were in early 2013 being revised downward, with many of the countries most affected by the crisis showing significant declines in output for several years ahead, and even the stronger economies not providing a powerful enough engine to lift the region as a whole. Outside Europe, too, growth has not returned to precrisis levels, and in some areas there are signs of renewed slowdown.

While policymakers debate the merits of breaking from ongoing austerity policies, what is clear is that the trade-off among policy choices has worsened. Debates about relaxing debt ratio targets take place against a backdrop of uncomfortably high fiscal deficits. Fiscal austerity over the past several years has generally failed to reverse the rapid rise of debt ratios, and the negative impact on growth was higher than earlier projected. Nevertheless, the use of fiscal resources to help resolve legacy assets and avert a credit crunch is problematic when fiscal space in many countries is exhausted well beyond levels that until recently would have been considered at the limits of riskiness.

The present environment makes even stronger the case for a number of the policies put forward earlier in this volume. First, it reinforces the message about the need to reverse fragmentation and resume economic and financial integration. National economic retrenchment was a pervasive result of, and contributor to, the depression of the 1930s. Fortunately, the general commitment among global policymakers to maintaining open markets has served so far to mitigate the impact of the recent global financial crisis. Nevertheless, there has been increasing financial fragmentation within Europe, under which banks have run down their cross-border activities. In addition, national authorities have sought to protect their domestic economies and national taxpayers by ring-fencing banks’ capital and liquidity positions to protect them from cross-border developments and the actions of cross-border authorities. Given where we are, only a secure and credible EU financial management architecture can be expected to reverse this fragmentation and to provide for a resumption of Europe’s progress toward creating a genuine single market. The proposals for establishing the SSM at the ECB, as discussed in Chapter 1 and in subsequent chapters, will represent a critical step toward financial management integration. This in turn can contribute toward stimulating growth both in the region and in the wider global economy.

The second theme is the need for greater transparency. If there is to be a reversal from fragmentation, and cooperative efforts at integration, policymakers and the wider public need to have confidence in each other. Banks need to be forthcoming in disclosing their financial positions and prospects. Data in a particular country need to be consistent and comparable with those in each other country, and there needs to be general oversight to ensure that this is indeed the case. Thus, the proposed asset quality review is important, as well as that the results, and the details of the methodologies, are published. The SSM will rightly undertake such a review as it takes on its role, and it will have powers heretofore not available to ensure cross-country consistency, as well as to enhance disclosure. As is increasingly recognized, it will be important to have a framework for resolution or recapitalization of the banks fully in place by the time of the review, so that any problems that emerge can be promptly addressed.

There needs also to be transparency over how much is not known. Especially in a crisis, outcomes are uncertain. Precision may be desirable, but spurious, and optimistic targets may be confused with central projections and thus lead to disappointment if not realized. Start dates for the SSM, and dates for countries under stress to recover market access, are examples where subsequent postponements have risked leading to disappointments and loss of credibility more generally. Even worse, overoptimistic targets risk inducing policymakers to go ahead with policies prematurely to avoid market reaction; the ECB has rightly been adamant that it will not succumb to any such pressures and will not declare the SSM effective before it is confident that the necessary requirements are in place.

The third theme is that of the need to establish and maintain strong banks. Capital buffers are the first line of defense against a bank’s losses. Deficiencies in early Basel agreements have been among the factors blamed for bank failures in the global financial crisis, and a new Basel agreement has been put in place to combat such deficiencies. The Basel III agreement prescribes a significant strengthening in banks’ capital; further increases in the levels of minimum capital have been proposed by the Financial Stability Board for systemically important banks and incorporated in the EU’s Capital Requirements Directive (CRD IV), with some countries indicating that they will require levels even above those being mandated under Basel and the prospective EU directive.

Against that, banks argue that tougher capital standards impede their ability to lend, and thus dampen economic growth. Although their argument is exaggerated,¹ low economic growth and policymakers’ keenness to stimulate without using fiscal resources have given arguments more weight at this time than might otherwise be the case. Most importantly, such arguments may influence regulators, supervisors, and policymakers as they implement CRD IV. In the low-growth environment, when banks are most fragile, the requirements put upon them are likely to be less strong, and over a more extended period, than would otherwise be the case. A number of the Basel proposals have been adapted for CRD IV, arguably thereby weakening it. Extending the transition period, as has occurred, would be a valid response to the conjunctural weakness, but setting lower standards for the end of the period would not help establish and maintain a strong European banking sector for the future. Responding to subregional cyclical differences in economic and financial conditions may well become the role of macroprudential policies.

Taking forward the reform agenda set out in this book is urgent and critical for resolving the crisis. It cannot wait until the conjectural environment has improved. Indeed, as argued here, the environment may well not improve until the reform agenda is in place. Reversing the fragmentation in EU financial markets, enhancing disclosure of financial statements, and increasing transparency more generally, as well as building strong banks, are necessary and interrelated conditions for taking forward the agenda to establish the new architecture for European financial oversight.

Paradigm Shifts

The new architecture is being established against two emerging paradigm shifts: first, that financial sector oversight in the EU can no longer be predominantly national; and second, that concern for financial sector stability will no longer be an argument justifying that the public sector (the “taxpayer”) will come first to pick up the pieces when things go wrong. The new paradigms themselves are not fully evolved, but nevertheless they provide a framework under which policymakers now operate. The growing perception that the EU’s financial sector problems are likely to be resolved through action at a Union (or euro area) rather than national level, and that it is bank creditors rather than taxpayers that have to be bailed in first, is very different from that held for instance during the Nordic banking crises of the 1990s.

The introduction of the euro transformed the economic environment, not only of those economies already in the Euro but also those seen to be aspiring to membership. Interest rates were lower, and borrowing and inward investment higher, in the “peripheral” economies in southern Europe and the emerging economies of central and Eastern Europe than if those economies were seen as fully self-standing.² When the global financial crisis emerged, although it did not originate within Europe, it spread to Europe quickly. The economies at the periphery were among those most affected and were where remedial measures were most out of line with domestic capacity. Their net foreign liabilities were already much higher than those, for instance, in the Asian countries at the time of the crisis there. Substantial policy and institutional innovation has been needed at the regional level and has kept the situation in check. Arguably, however, the limits to this innovation have so far kept the situation fragile, and full recovery not yet assured.

In this context, it is worth stressing that the increased impact of a Union framework in addressing the consequences of the crisis has not been limited to the more visible examples of the countries under “troika” (EU/ECB/IMF) adjustment programs, or even those of the euro area. The establishment of the EU’s single market in financial services means that the European financial landscape has been dramatically changed throughout the EU, in particular through the mandate of the Directorate-General for Competition of the European Commission (DG COMP). The major banks in, for instance, Netherlands and the United Kingdom that have received state aid have been required by DG COMP to downsize substantially, in principle providing space for new financial groups to emerge and other groups to operate on a “level playing field.”³ There has been much criticism of the specifics and the timing of DG COMP’s interventions, as well as whether the linkage within DG COMP of the competition and financial stability mandates makes sense. However, there has been no questioning of the general principle that competition policy is a legitimate Union concern—one of most integral elements of the single market—and that safeguarding competition is an issue to be addressed at the Union level.

The planned introduction of the SSM as an element toward a full banking union for euro area countries and any other EU members that wish to join is a fundamental step toward increasing decision making at a supernational, if not full Union, level. The implications of the SSM, and the further steps toward a banking union, are discussed in Chapter 1 and subsequent chapters of this volume. Overall, the establishment of the SSM will involve a marked shift in policy responsibilities toward the ECB. A number of important challenges as this shift occurs are enumerated in Chapter 9. In the future, the decision to establish the SSM may be seen as the “tipping point” beyond which a country’s economic prospects (at least for all except possibly the few largest) is seen as dependent more upon decisions at the regional level rather than in individual member states.⁴

All this said, the EU works on the principle of subsidiarity, and national authorities are keen to safeguard their involvement in policymaking and in the financial sector infrastructure where this remains effective. For instance, the operation of the payments systems, the heart of the financial sector plumbing, remains under national responsibility. Where a function moves to the Union (or euro area) level, Union (or euro area) decision making involves many participants, ensuring democratic accountability is maintained. This process, however, can give the appearance of dithering and ineffectiveness at times when demonstrations of more rapid and forceful interventions may be critical.

As important, the oversight architecture being put in place is designed under a paradigm that seeks to eliminate, or at any rate to minimize, bailout-related public sector expenditures. The announcement in 2009 by the Irish government of a blanket guarantee on all deposits in Irish banks was fully in line with governments’ handling of past financial crises, but it drove up the cost to the public sector of resolving the bank problems beyond the level at which the Irish government was able to pay. So as to avoid deposits flooding to Ireland to take advantage of this guarantee, other EU countries followed suit, offering similar guarantees, driving up the potential cost of bank resolution across the region, and reducing the options of how to achieve resolution.

Several interrelated factors have driven the consensus away from using taxpayer money as a first resort for resolving banking problems. The first is that most EU countries feel they have exhausted their fiscal space, and that protecting their banks would not be their greatest priority. In the early stages of the crisis, many countries (including Germany, the Netherlands, and the United Kingdom) spent large amounts to capitalize their banks, while others (such as France) faced large fiscal shortfalls as a direct result of deteriorating economic conditions. As important, the protracted economic slowdown has led to a major deterioration in countries’ fiscal positions, with fiscal recovery projected for the periods ahead to be slow and uncertain. In a number of countries, the sovereign has already suffered contamination from its banks. For the sovereign to take on large additional commitments might worsen its position further and, in some extreme cases, not be credible.

Moral hazard is the second factor leading to a change in paradigm. Public sector support is seen as a “bail out” of the banks, which in turn implies that the private sector does not incur the costs of its own actions and may therefore not be deterred from undertaking such actions again. While the recent financial crisis was geographically and quantitatively different from earlier crises, some of the largest banks in the crisis (particularly in the United States) were playing a repeat role, having been involved in other crises in other places. There is an increasing view that, with bail-outs, lessons may not be fully learned, and that behavior leading to crisis may rapidly resume.

The third factor is the feeling that managing banks during restructurings is complicated, and that up-front nationalization with taxpayer money may lead to a deterioration in the quality of the assets, and thereby lower ultimate recoveries. There is evidence in some past cases of a deterioration in the quality of such assets, leaving the state with higher costs than anticipated, for instance in Indonesia,⁵ there have been cases where the state has managed its assets well, and substantially recovered its earlier outlays—for instance in Sweden in the Nordic crisis and more recently the takeover of AIG.

Perhaps most fundamentally, there is popular revulsion against using scarce taxpayer resources upfront to bail out banks’ risky activities, especially at a time of cuts in many other areas. Widespread stories about bankers’ bonuses and pension payoffs have only served to increase this feeling.

There is the empirical question as to how far private sector bail-ins can fully compensate for the withdrawals of public support. This is a work in progress. As discussed earlier in this book, new instruments are being developed that can be used to absorb losses in a bank: contingent capital instruments can add to a bank’s capital base.⁶ In addition, liabilities of the bank can be subjected to haircuts to reduce any remaining hole; minimum levels of bail-inable capital are being defined, so that larger holes can be filled. Also, a significant share of liabilities can be insured, through a deposit guarantee fund, with such a fund preferably financed ex ante by the banking sector but in any case under an authority with powers to levy funds from the banks ex post.

These measures that bear on a bank’s balance sheet are to be complemented by three sets of more structural measures. First, as shown in Chapter 14, in some countries there are moves to improve the legal position of creditors, thus enhancing banks’ ability to take action against nonperforming debtors, and thereby increase their ability quickly to take control of any nonperforming assets. Second, as shown in Chapter 23, there are plans that large banks involved in “more risky” business have the risky business separately capitalized, in part so that it can be resolved separately without spillover on to the more traditional banking business. Finally, the prospective EU Resolution and Recovery Directive should have clear rules for early intervention, so that a failing bank can be resolved before its losses have grown beyond the capacity for resolution through its own balance sheet and the funds that provide backing.

Even with all these elements in place, bank resolution may continue to need public involvement, albeit at lower levels than hitherto. However, a number of these elements are not certain, and most will take some time. For instance, even when a deposit guarantee scheme is established, it will take time in most countries for levies to produce sufficient funds ex ante that could cover the insured liabilities of a large bank failure. Also, even with all elements in place, there will not be assurance that these will be sufficient. There thus remains a need for public sector backstopping. Arguably, as with liquidity support, the greater the potential availability of such support and the credibility of assurances that it will be provided, the less likely that it will actually be needed.

The new paradigm in Europe therefore focuses on strengthening the banks themselves, and then increasing the share of the bank’s balance sheets that is either insured by industry-financed funds or available for bail-in. National fiscal back-stopping is needed behind this. Then for those countries without fiscal capacity, there needs to be a regional backstop. It has been agreed that the European Stabilization Mechanism (ESM) can under certain conditions directly recapitalize banks. Although its resources are limited, given that it is to be the backstop to the backstop, they may be sufficient—and experience of recent years has shown that if more is needed there can quickly be agreement that more will be provided. It is strongly urged that agreement on the modalities of accessing the ESM be finalized quickly.⁷

Variable Geometry

In moving forward on creating the architecture for financial sector oversight, the EU reaches a new stage. Up to now, there has been a single aspiration to which the “European project” has been heading. Thus, the single currency was designed for the EU as a whole, albeit with two countries having “opt outs” that at least notionally were temporary, and with other member states waiting to meet specified economic criteria before they were admitted. There are other areas where opt outs have been granted to meet specific national concerns: for instance, Denmark has the right to discriminate against foreigners buying certain residential property. Such waivers have not, however, had any systemic impact on the overall perception of an EU heading toward a common goal.

The establishment of the SSM, mandatory for all members of the euro area and open to all others, changes this.⁸ Sweden and the United Kingdom have indicated that they do not wish to join the SSM at this time, and other member states may also do so. This is no longer even a “two-speed Europe” since some of the outs have indicated that they do not wish to go at any speed in the direction in which countries of the EA are heading. Meanwhile, the SSM is being followed by important further institutional development, in particular the single resolution mechanism, for SSM countries. The envisaged recapitalization agency, the ESM is only for the countries in the euro area, raising questions as how non-euro area countries that join the SSM will obtain support. Over the next few years, therefore, financial oversight and management across the SSM countries will become increasingly integrated. But as this develops there is a risk that there will be increased fragmentation in the EU outside the SSM area.

The single market is one of the main achievements of the EU, even though it is still a work in progress and has suffered serious setbacks since the onset of the global financial crisis. Moves toward further integration over the past several decades were prompted in part by the vision of an ever-closer union, and also because of perceived instabilities in the halfway house to integration. Thus, a single market without currency union was perceived from the experience of the exchange rate mechanism to be unstable, leading to work that culminated in the introduction of the euro. And now the single currency is seen as unstable, leading to pressures for a banking union as well as a fiscal union. Work is fully in train at least on the first of these.

This raises the question as to whether financial stability in the EU, or even in the SSM member states, can be assured when parts of the EU participate in the single market and yet not in the new elements of the financial oversight infrastructure. After all, every major bank that operates inside the euro area also operates in countries in the EU outside the euro area. Also, one of the key elements of the single market in banking is the single passport: hence the SSM authorities have no power to deny access to the SSM area to a bank that is licensed elsewhere in the EU. Given that the establishment of the SSM is seen as a necessary concomitant to the single market in banking, it may be unclear as to how the establishment of the SSM in only a part of the EU is sufficient to create the conditions to retain the single passport and other elements of the single market in the rest of the EU.

One answer may be that ring-fencing will continue. Unless “out” countries participate in the SSM and the prospective single resolution mechanism, incentives for national action will likely remain as before. While separate capitalization, for instance, may be eliminated within the SSM area, it may persist in the “out” countries, and indeed within the SSM area as a whole vis-à-vis the out countries. This hardly would reflect the necessary re-integration of the EU financial system.

To combat this risk, the establishment of the SSM and the single resolution mechanism for the countries in the SSM cannot be the end of the story. Intensive work also is needed to ensure common supervisory practices across the EU, as well as common arrangements for resolution. Arguably, this can be handled by the SSM bilaterally with the individual “out” authorities. Consistently with past institutional development, however, the European Banking Authority (EBA) would be a natural body to take on this role, consequent on the completion of its “single market rulebook.” Consistent application of the single rule-book across the EU is needed to give assurances in both directions: first that the “out” countries are not free-riding by seeking, for instance, to attract banking activity through having a lighter supervisory touch, and on the other hand that the countries of the SSM are not seeking to obtain an unfair advantage through using their dominant position within the EU to turn the rules in their direction. Careful attention will need to be given to ensure that the EBA is able to deliver in this area. It will need to devote resources to explaining this particular aspect of its work, researching and making clear to the wider community the benefits of maintaining the single market in banking, the threats that could undermine the single market, and the losses to the Union as a whole if it were to fall apart. At the moment the ECB has insufficient resources even for its current responsibilities.⁹ Also, there has so far been no recourse to its powers for mandatory mediation, which might be considered a precursor to the role that is envisaged here. Urgent consideration should therefore be given to a model of partnership, wherein the EBA works with the EU supervisors—the SSM and the “out” authorities—to ensure the level playing field across the EU. The agreement of December 2012 for a “double majority” of the SSM countries and the “out” countries will have been a helpful step to bring this about if all member countries accept the concept of the variable geometry within the opportunities and constraints of the single market.

As important will be the need to find a way to ensure ex ante arrangements for resolution across the EU that can generate sufficient confidence to foster the dismantling of intra-EU ring fencing and the continued acceptance of the single European passport for banking. Much work has been undertaken by the Financial Stability Board on the Key Attributes of resolution (see Chapter 7). Also, the United Kingdom has recently announced an agreement with the U.S. Federal Deposit Insurance Corporation on a Single Point of Entry approach for large banks, under which national authorities defer to the home country authority for the resolution of the whole bank, and that the home country tries to achieve this by working first on the holding company above the bank while in principle allowing the banking subsidiary to continue operating. While these proposals are primarily intended for systemically important banks, and serious questions remain as to how easily the Single Point of Entry can be applied, they could have applicability for other cross-border banks in the EU.

In this connection, as cross-border financing of bank resolution develops—through single country resolution funds, the ESM, or possible successor agencies—clarity will be needed as to how the “out” countries interact with those in the SSM. For example, the United Kingdom has contributed to the multiparty financing package for Ireland but declined involvement elsewhere. Correspondingly, it is understood that the United Kingdom would continue to follow the practice it has adopted so far during the crisis and resolve any U.K. bank where needed entirely through its own resources. Insofar as there are banks that operate in the EU, both in SSM and non-SSM countries, cross-border issues are likely to be resolved in line with the Key Attributes for resolution developed by the Financial Stability Board, and with the EU’s Resolution and Recovery Directive. And where state aid is concerned, under existing rules, DG COMP will seek to ensure comparability across the Union.

In short, it should be possible to progressively eliminate fragmentation in EU banking within a framework of variable geometry in the EU, given the overarching EU framework on regulations, resolution, state aid, and associated issues. This is possible as long as all member states, including those not participating in the SSM, cooperate in ensuring a level playing field for supervision and resolution, and demonstrate their ability and commitment to resolve any emerging banking problems within these emerging frameworks. The EU has shown resilience in other areas of the agenda where “one size does not fit all.” This may be a further area for meeting such challenges.

Financial Centers

In the United States, particular states have emerged as the dominant location for particular types of activity. Similarly in Europe, a number of countries have developed particular specialties or attractions that have led them to attract a disproportionate share of a segment of the EU’s financial business (see Chapter 8). Most importantly, London is the host for a large part of the EU’s banking activity, while Luxembourg is dominant in particular segments. Among countries in the periphery, before the crisis Ireland attracted much business, aided at least in part by its low corporate tax rates, while banks in Cyprus held volumes many times the size of the country’s gross domestic product in large deposits from outside the EU.

While the activities of some of these centers have caused irritation and concern elsewhere in the EU, particularly when they fell into difficulty, the enduring nature of the major financial centers indicates that they are seen as benefitting both the centers themselves and the EU as a whole. Although the EU is a large market, much of its banking activity relates to the rest of the world, and the infrastructure requirements for global activity may be different from those that are employed for activity within the EU. All major EU banks divide their activities between those conducted locally and those in London (as well as cross-border in the EU and sometimes in other financial centers, too). Analogously, in the United States international business is conducted from New York; also, 75 percent of non-U.S. business of U.S. banks is reportedly conducted through London.

One risk to the EU of having financial centers within the Union area is that a country seeking to attract such business may distort the level playing field by offering fiscal or other financial incentives, or by being less intrusive in its prudential oversight. The “soft touch” approach to supervision indeed seems to have been one of the selling points of putative financial centers before the crisis. That model has now been discredited. Indeed, with depositors and investors nervous about the safety of their deposits or investments, the picture has reversed, and centers seem to be seeking business on the basis of how tough their supervisory regime now is. This has led, for instance, to accusations that prudential requirements above regulatory minima may reflect “gold plating,” and that regulatory requirements should therefore also represent levels of “maximum harmonization.” While there may be something to this argument, in the present environment it is not tenable to deny individual countries scope to raise requirements above minimal levels if they consider this necessary on prudential grounds. It is therefore recognized that capital requirements on banks will vary somewhat from country to country, but it is not clear whether those in financial centers will be higher or lower than elsewhere.

The other main risk is that a country is so successful in attracting business that a level of activity results that the country itself could not handle if its banks fell into difficulty. A difference with New York is that the State of New York would not have to handle problems that arise from activity on Wall Street. In the EU, countries participating in the SSM will progressively benefit from the resolution infrastructure being established for the SSM members. Other countries would likely be much more on their own. Given the integration within the EU, and the intensity of spillover effects in the event of difficulty in a major member state of the EU, there is clearly a common interest in securing full assurances that each member state has capacity to resolve any banks in its jurisdiction that fall into difficulty. As noted above, this will require, among other things, intensive work between the SRM and the authorities in the various “out” countries.

In short, especially after the Cyprus experience, countries may be leery about seeking to establish themselves as financial centers. Moreover, in an environment of nervousness and fragility, they may not be very successful if they try to do so through measures that reduce the soundness of activities in their jurisdictions.

Asset quality reviews and enhanced oversight, particularly within the SSM area, are likely to further reduce the scope for developing a financial center through unsound practices, and assessment of resolution capacity should mitigate the risks if such centers do develop. Possibly the security of the single currency, and the progressive integration of the financial sector oversight framework more generally, will lead business to move toward the SSM area. If so, the synergies inherent in close geographic proximity may lead to the emergence of a financial center within the SSM area, possibly in the location of the SSM headquarters itself. On the other hand, measures such as a transaction tax, if applied through part of the Union, could lead business to redomicile to parts where the tax is not levied. In any case, market-distorting restrictions intended to attract centers are likely to be counterproductive. In an EU with a healthy financial sector, properly supervised financial centers—which may be general or seek a specific market niche—will make a positive contribution to the EU economy as a whole.

Beyond the Constraints: A Treaty for Financial Stability

Views differ as to how far one can take the development of the financial oversight infrastructure without seeking a change in the present EU Treaty. The various steps envisaged in the near term for establishing an SSM and a single resolution mechanism can be achieved without treaty change, although working with the present treaty means working around certain constraints. Meanwhile, partly because of limitations as to what can be done under the existing treaty, certain elements of establishing a comprehensive architecture are being left to a later stage. Correspondingly, key elements of the infrastructure now being introduced could be made more robust at a later stage if they were also incorporated into a new Treaty. In the long term, a Treaty for Financial Stability—when the time is right—would give prominence to financial stability as a central area for EU oversight and be a culmination of the process of building the infrastructure that has been going on since before the start of the crisis. It should be stressed again, however, that the fact that the ultimate Banking Union may well involve treaty change is not an argument for delaying the establishment of the SSM and single resolution mechanism as quickly as it is possible safely to do.

Regarding the first of the factors listed above, one key element that a Treaty could address is the emergence of the SSM and its complementary institutions as key elements of financial sector oversight within the EU. Under the present Treaty, all ECB decisions must formally be taken by the Governing Council, and only member states using the single currency can participate on the council. This becomes problematic insofar as the SSM includes countries that have not adopted the single currency. The ECB has worked around this, with a separate body taking decisions on supervisory matters, with the Governing Council limited to a ratifying role, but a separate decision-making body for supervisory matters would accord better with the reality. Perhaps more problematically, decisions by the Council of the EU require the votes of all EU members, with unanimity required for some decisions and qualified majorities for others. There would seem to be scope for some decisions regarding supervision and related matters affecting only those member states participating in the SSM to be decided just by those member states.

Much can be done without a change in the Treaty and should not be delayed because Treaty change may be useful for some later stages of the reform program. Beyond that, however, the establishment of a Single Resolution Authority may also be facilitated by Treaty change insofar as it involves potential commitments of the funds of a member state to another member state. While, as discussed above, the prospective single resolution mechanism, together with the innovative approach to bail-ins, may limit the need for cross-country backstopping, its potential availability could serve to reassure markets and could provide incentives for member countries in the SSM to exercise effective oversight of the banking systems in the SSM area as a whole.

There has been a thoroughgoing restructuring of the EU’s financial oversight infrastructure over the past few years. It would be helpful to codify these, and therein identify possible inconsistencies and gaps. The result would also be legally more robust and therefore deter opportunistic challenges that might emerge with the present regulatory backing. Although such challenges might be frivolous with little chance of success, they could be distinctly unhelpful at a time of fragility.

Finally, financial stability could be specified as an area of EU competence, alongside competition policy, agriculture, and others. It could give an overarching framework both for the SSM and its complementary mechanisms, as well as the further integration envisaged by the participating countries. At the same time it could codify the arrangements regarding countries in the EU (or more broadly in the European Economic Area) so as to avoid segmentation from the SSM participants, safeguard financial stability across the region, and ensure the prospective reestablishment and development of the single market for the wider membership. Even if at the moment only an aspiration for the medium term, this would be a fundamental achievement for the EU, and would make a significant contribution to fostering strong and sustainable growth for the foreseeable future.