In this regard, the banking union with effective supervision and bank resolution can foster the necessary restructuring in the euro area banking sector, can further spur balance sheet repair and can restore the banking sector’s intermediation function. In particular, a European resolution mechanism with adequate powers and tools will be needed for effective resolution without involving taxpayers’ money. At the same time, this framework will ensure the revitalisation of the banking sector and revive financial integration. The early repayment by banks of the liquidity received from the first three-year LTROs has given initial mild indications for improvements in banks’ funding conditions and the overall health of the banking sector. But complacency is not warranted. Balance sheet repair in the euro area banking sector has to continue to fully restore wholesale and interbank funding markets, which will allow banks to return to their normal sources of funding, releasing them from the strong dependence on central bank intermediation, particularly in the case of banks receiving ELA. Conclusion Let me conclude. The sovereign debt crisis has thrown into reverse the steady financial market integration seen since the inception of the euro. This trend was largely driven by the link between banking and sovereign risks. 6  BIS central bankers’ speeches  The crisis has hampered financing conditions. By consequence, the monetary policy transmission channel has been clogged and ECB has been compelled to apply unconventional measures to repair the distorted flow of credit in the euro area.
Implementation of Basel III for liquidity ratios by parent banks may have implications for domestic banks and monetary policy implementation in our countries. The liquid assets of our domestic banks are composed at large portion of domestic CB-bills and T-bills and accordingly, they are without investment rating (S&P BB with stable outlook; Fitch BB+ with sable outlook). This could cause serious disruption of design and effectiveness of monetary policy. Possibly, it could ask for transition from market based instruments to direct measures -such as reserve requirement. Another challenge is to straighten the coordination with the home-host supervisory authorities. It is extremely important and central to the country’s financial stability. NBRM is adequately included in the operation of some of the supervisory colleges, but not for all  2  BIS central bankers’ speeches  Macedonian subsidiaries of foreign banks. As a result, NBRM is not always adequately informed, which could harm its ability to effectively determine the necessary capital level of these banks. In addition, there are still some unresolved gaps in regulatory coordination between home and host countries in the EU Single Supervision Mechanism. And last but not least, the future challange will be impact of Single Resolution Mechanism for a European banking union to our banks and the prospective scaling-back of unconventional monetary policy that could affect the borrowing costs. Summing up, the ongoing international regulatory reform, though primarily intended to promote financial stability, may also have some unintended adverse effects on emerging and developing economies, with SEE region not being an exemption.