Financial crisis undermined EU-wide banking integration, says ECB’s Coeure

Out-Law News | 08 Sep 2014 | 10:46 am | 2 min. read

The financial crisis “undermined” the process of integration and prompted “a further retrenching of retail banking services within national borders”, European Central Bank (ECB) executive board member Benoit Coeure has said.

Coeure told an ECB conference in Frankfurt this week that the EU’s new regulatory and supervisory framework “has the potential to steer us towards deeper cross-border integration”.

Coeure said the global financial crisis also “made us understand that the size of the financial sector can exacerbate the trade-off between economic efficiency and financial stability”. He said “while finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity”.

Recent changes to the global regulatory architecture, particularly regarding the banking union in Europe, “are in part aimed at mitigating the negative effects that a large and complex modern financial industry can have”, Coeure said. “These changes should be implemented in a way that avoids eliminating the positive impact of financial services on growth and tackling financial complexity with overly complicated and excessive regulatory interventions.”

However, Coeure said policy-makers “should be increasingly aware” of the importance of overcoming fragmentation in European capital markets and of achieving a single market for capital.

In addition, Coeure said “we need to be mindful of the fact that the macro problem (the financial sector being ‘too big’) and the micro problem (individual financial institutions being ‘too big’), are not necessarily identical”.

“Even if the financial sector is small relative to the real economy, it may be comprised of banks whose incentives are misaligned due to ‘too-big-to-fail’ considerations,” Coeure said. “This can lead to excessive risk-taking and inefficient credit growth and has inspired recent changes to regulation and prudential policy.”

Coeure said the size of individual banks is “also a relevant consideration, albeit not the primary one, when it comes to measuring their importance in terms of systemic risk and determining their contribution to the Single Resolution Fund”. An intergovernmental agreement on the fund, to finance the restructuring of failing credit institutions, was signed by 26 EU member states in May 2014.

Coeure said “timely data reporting is another critical issue, because policy-makers need to know in real time what is going on inside the system”.

Regarding capital market integration, “things can only improve in the future, given Europe’s high reliance on bank funding”, Coeure said. He said it is “likely” that reducing the percentage of debt on balance sheets in the global banking sector “will stimulate the development of non-bank financial intermediation in Europe”. As a “sign of things to come... the decline in bank credit is already to some extent compensated for by an increased issuance of corporate bonds”, Coeure said.

Work by the Switzerland-based Financial Stability Board (FSB) on data harmonisation and on filling data gaps is also “critical”, Coeure said. The FSB coordinates at the international level the work of national financial authorities and international standard setting bodies.

At a meeting last month, members of the FSB regional consultative group for Asia said policy priorities included focusing on initiatives such as “ending too-big-to-fail and transforming shadow banking” (2-page / 115 KB PDF).