The UK has nothing to fear from the creation of a single euro area supervisor. What would have changed if the European supervision system had have been in place, for example for the Crédit immobilier de France (CIF)? Technically, not a lot. Instead of the French Autorité de contrôle prudentiel, the ECB would have asked the CIF to increase its capital. But make no mistake, banking supervision is not a catch-all insurance. In the case of the CIF, we were aware of its fragility stemming from its increasing refinancing difficulties and we knew that there were longer-term liquidity risks. The CIF is a textbook case where a downgrade by ratings agency expedited the disclosure of funding problems. Would you say that Moody’s was responsible for this situation? No, the primary responsibility lies with its management, which was unable to find a merger solution when it was possible and we had asked it to do so. Did you lack coercive power in this case? Yes, definitely. We have very great powers when an institution does not comply with regulations, but we do not have powers that enable us to prevent a crisis. As things stand, we can appoint temporary administrators if need be or revoke an authorisation, but we do not have powers of resolution allowing us to impose the restructuring of a banking group or transfers of assets. We worked on a draft regulation before the European project started to be discussed, but we underestimated the length of time needed to arrive at a European proposal.
Some have had to implement austerity plans and others, less drastically, are undertaking structural reforms and continuing to reduce their government deficits. This is the case of France. Even if these efforts appear moderate compared to those of other countries, they are necessary for our market credibility. Brussels has presented its proposals for a European bank supervisory mechanism; are they in line with your expectations? Yes, they are. The developments of the financial crisis have brought to light one of the euro area’s fragilities: the link between bank and sovereign risk. Following the collapse of Lehman Brothers, governments bailed out their banking systems and, in doing so, established a nexus between sovereign debt and local banking systems, which interferes with monetary policy transmission. When the euro area sovereign debt crisis erupted, bank refinancing conditions became correlated with sovereign risk, with the consequences that we have witnessed for ailing countries. The large amount of liquidity provided by the Eurosystem has reduced this impact, but funding costs have remained very high in some countries. It was therefore essential to decouple sovereign risk from bank risk. The banking union will ensure a sounder monetary union. Germany has expressed doubts as to the proposed set-up, in particular with respect to the number of banks covered by the ECB. Could this prove a threat going forward? The proposed union implies a transfer of sovereignty from States to the ECB, which Germany has always wished for.