Benoît Cœuré: Why the euro needs a banking union Speech by Mr Benoît Cœuré, Member of the Executive Board of the European Central Bank, at the conference “Bank funding – markets, instruments and implications for corporate lending and the real economy”, Frankfurt am Main, 8 October 2012. *  *  *  I would like to thank Carmelo Salleo for his contribution to the speech. I remain solely responsible for the opinions expressed herein. Introduction Ladies and gentlemen, It is a great pleasure to be here with you this evening as part of this conference. I firmly believe that good research underpins policy choices and, as you know, the European Central Bank (ECB) is very committed to carefully conducted, high-quality analysis as the bedrock of its decision-making. Bank funding has been the focus of policy-makers’ concerns for the past few years, ever since the collapse of Lehman Brothers, which brutally reminded us all of the systemic dimension of liquidity and funding risk. Such a cataclysmic event elicited a host of responses, ranging from central bank interventions to prevent a meltdown of the financial system to the design of new regulations to limit risk-taking by financial institutions. The shock was global – and the response has been global. However, much work still needs to be done, so I welcome opportunities such as this conference to gain a better understanding of the dynamics and determinants of bank funding and of their implications for the financial system and the real economy.
The Emergency Financial Control Board was empowered to review all fiscal decisions of local officials and demand changes to the city’s budgets. Part of the city’s tax base was dedicated to bond repayment—essentially handing it over to the city’s creditors. For 10 years, the city could not access the debt markets without support from the state. The economic pain was also very real. More than 70,000 city government workers were cut from the payrolls in 1975 and 1976. City residents faced dramatic service reductions—fire houses closed, schools and police precincts had fewer resources, and crime continued to rise for many years. It is also important to note that New York isn’t the only U.S. city that has been through a major fiscal crisis. Cleveland, Philadelphia, Washington, D.C. and, most recently, Detroit have all struggled to manage their budgets, and all ultimately reached a point when they were unable to pay their bills. As a result, these cities lost their fiscal autonomy to one degree or another. In the case of New York City, this turned out relatively well, as the short-run loss of decision-making power led to a strong economic rebound that eventually restored the city’s ability to finance its own choices. So, is New York City’s experience really all that instructive for Puerto Rico? With the advantage of hindsight, it now seems almost obvious that New York City’s fiscal crisis was only going to be a detour. The city’s economy had many fundamental strengths, so it only needed some assistance to get back on track.