SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Banking union and financial integration in the European Union Erkki Liikanen Governor, Bank of Finland Interparliamentary Conference on Economic and Financial Governance of the European Union Vilnius 17 October

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Key messages When the financial markets are international and/or integrated, the national supervision and resolution mechanisms alone are not able to safeguard financial stability. The banking union is needed to protect a sovereign from weak banks, and to protect banks from a weak sovereign. Financial integration is an essential element of the single market. The door is left open for non-euro area member states to join the banking union. 2

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND The single market Mutual recognition –freedom to sell services and to establish branches across borders (single passport principle) Home country supervision –cross-border activities and branches to be supervised by the home country supervisor Minimum harmonization –regulatory standards to be harmonized by Community legislation member states allowed to impose stricter standards. –level playing field for the competition between financial firms 3

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND The Single Currency Financial integration was regarded to be a prerequisite for the smooth transmission of single monetary policy. –the single currency was expected to make the goods and services market more transparent intensifying competition and thereby enhancing productivity. The Maastricht Treaty did not change the foundations on which the single market for financial services had been set –in particular, the principle of home country supervision was not challenged. 4

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND The financial trilemma 5 Financial integration Safeguarding financial stability National supervision and resolution Dirk Schoenmaker, The financial trilemma, Economics Letters 111 (2011) 57–59.

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Banking union (Euro Area + opt-ins) Single Supervisory Mechanism Efficient Supranational Uniform Close cooperation with national supervisors Single Resolution Mechanism Harmonised tools Investor/debtor responsibility(bail-in) Industry responsibility (resolution funds) No bail-out Harmonised deposit insurance schemes Harmonised national systems Industry responsibility (funds) Single Rulebook (all EU)

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Banking supervision Efficient Supranational Uniform Resolution Harmonised tools Bail-in Resolution fund No bail-out Deposit insurance Harmonisation Industry responsibility (funds) Bail-out of banks Expensive Politically loaded Case-by-case (ESM) When this is properly done … …the likelihood of this is significantly reduced. 7

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Conclusions We need to create a financial landscape in Europe which will contribute to the completion of the single market and to financial stability. We need a financial system which will transmit monetary policy more evenly across the euro area than is the case today, when renationalization of finance hampers European economic recovery. Some steps are politically difficult and require significant structural and financial adjustments in the banking sector. These obstacles are worth overcoming. More European supervision and more resilient banking structure would only benefit Europe. 8

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Thanks 9