Discounting the flow of future pension liabilities by a corporate bond rate only makes sense if the fund is no longer required to meet those liabilities in the states of the world where the bond defaults. But this is not generally the case: broadly speaking, the fund needs to meet its liabilities whatever happens. In normal times, this does not matter very much as the spread of investment-grade bonds over gilt yields is pretty small and does not vary very much. But during the peak of the crisis, the spread – even for investment-grade bonds – rose significantly (Chart A). Consequently, when standard accounting conventions are followed an additional factor needs to be added to Charts 4 and 5, reflecting the impact of changes in the corporate bond spread. That is shown by the mauve bars in Charts B and C respectively; the profiles of the other components of the deficit are unchanged. The main consequence of this is that the value of liabilities falls markedly during the period up to early 2009, indeed so much so that it counteracts the loss in asset value due to the fall in equity prices and pushes the fund into surplus. But it would be unwise for the sponsors and trustees of a pension fund to take comfort from this, given that the fall in the value of liabilities was merely an artefact of an increased probability of default on corporate bonds!
For money to be truly one, it has to be truly fungible independent of its form and independent of its location. In particular, deposits, which are the most widespread form of money, have to inspire the same level of confidence wherever they are located. To ensure that deposits are truly as safe everywhere across the euro area, the likelihood that a bank fails has to be independent of the jurisdiction where it is established. Resolution has to follow the same process in the event that a bank fails. And, when push comes to shove, depositors must be afforded similar protection wherever they are located. Fundamentally, this was and remains the agenda of Banking Union. And it is why Banking Union was conceived with three pillars: a single supervisory mechanism, a single resolution mechanism, and a uniform deposit insurance scheme, which remains to be specified. For money to be truly one, we need all three. Supervision had to come first, not because it was the easiest to establish, but because it was the necessary condition to proceed with the other pillars of Banking Union. That the SSM was established at the ECB owes much to circumstances. There are benefits in the current set-up, but that was not of vital importance. What was of absolutely vital importance, however, is that the SSM was established. In a fiat money system with fractional reserves, sound and uniform supervision is essential to there being a sound and single money.