Yves Mersch: The European banking union – first steps on a long march Speech by Mr Yves Mersch, Member of the Executive Board of the European Central Bank, at the Finanzplatztag, Frankfurt am Main, 27 February 2013. *  *  *  Dear Mr Padberg, Ladies and Gentlemen, I am well aware that many of you are concerned that the European Central Bank’s assumption of the supervisory role might overburden monetary policy. However, if well designed, set-up and managed, the banking union will eventually ease the burden on monetary policy. This will not happen by itself, though. Numerous stumbling blocks need to be cleared in the preparatory phase. But let me start without further ado. The success of monetary policy rests on integrated financial markets that operate efficiently and smoothly. They are: 1.  the basis for the equal transmission of monetary policy across member states in a monetary union;  2.  a key channel for the proper transmission of the monetary policy stance to the real economy – and hence for the ability of monetary policy to deliver price stability. However, the crisis has brought the flip side of financial integration to the fore, namely interconnectedness and increased risks to financial stability. Indeed, an integrated financial and economic system is more prone to contagion from large adverse shocks. Financial turbulence can more easily spread across markets and regions. This is particularly true if no institutional safeguards – such as euro area-wide crisis management arrangements – are in place.
Various actors in the economy may be relieved from pressures to take up their own responsibilities, thereby lowering the incentives to correct imbalances, unwind past excesses and redress the course of unsustainable economic and financial policies. BIS central bankers’ speeches  3  Second – and more fundamentally – non-standard monetary policy cannot solve the underlying structural economic and financial problems. The banking union – restoring financial stability and reintegrating financial markets The banking union aims at building an integrated financial framework to safeguard financial stability. To this end, it is absolutely imperative to have both an EU framework for single supervision, the SSM, as well as an integrated resolution framework, the SRM. Stability comes from having two pillars. The Single Supervisory Mechanism One particular institutional shortcoming of Economic and Monetary Union (EMU) derives from the inconsistency between a single monetary policy and national supervisory competences. A step up of supervisory powers to the supranational level was therefore needed to reverse financial fragmentation, with a view to breaking the link between sovereigns and banks, restoring the principle of self-responsibility and avoid objectionable transfers. By centralising supervision, the SSM should ensure uniform practices across Europe and overcome the home-host cross-border supervisory discussions and the associated national bias. The establishment of a single supervisor marks a new epoch in the EU financial framework, which may be comparable to the creation of monetary union at the end of the last century.