Today, the euro area’s banks continue to grant more than 90% of credit to firms resident in the same country, with only 5% going to firms in other euro area countries. In the case of loans to households, the bias is even greater. Expanding this foreign activity is essential for the sound working of the euro area. In this respect, there is still a long way to go before we achieve a pan-European banking system and a more complete Banking Union. The need to complete Banking Union Since Banking Union was launched in 2012, substantial institutional progress has been made towards the creation of a new common supervisory and resolution framework. The aim has been to restore lost confidence and ensure protection for depositors, irrespective of their nationality. The first pillar of Banking Union – the Single Supervisory Mechanism (SSM) – has indeed been completed. Today, the European Central Bank (ECB) directly supervises significant credit institutions, which account for almost 82% of all banking assets in the euro area. Progress has also been made in the case of the second pillar, with the creation of the Single Resolution Mechanism (SRM). The SRM establishes uniform resolution criteria according to the principle of the lowest possible cost to the taxpayer. However, for completion of the Banking Union important institutional challenges remain. First, the creation of a common financial backstop for the Single Resolution Fund (SRF), to ensure that it has sufficient resources to withstand future banking crises without destabilising the public finances of the countries concerned.
The (scant) risk-sharing channels in the Economic and Monetary Union Completing Banking Union and developing the European Capital Markets Union are, moreover, key objectives for securing the appropriate and stable functioning of the European Economic and Monetary Union (EMU). Comparing the workings of EMU and of the United States, in terms of the mechanisms each have in place to cushion the impact of shocks affecting a single country or State, illustrates clearly how far we still have to go. Indeed, the empirical evidence suggests that, in the United States, around 70-80% of the impact of shocks affecting a particular State is distributed among the other States. In this case the main risk-diversification channel is through the workings of the capital markets. Hence, the cross-border ownership of capital allows around 40% of the asymmetric shocks within the United States to be shared. The credit channel, which operates through the granting of credit by non-resident institutions to resident agents, enables around a further 20% of asymmetric shocks in the United States to be shared. Conversely, in the euro area, around 70% of the financing received by households and firms is mediated by the banking sector, while only the remaining 30% is obtained on capital markets. This is practically the opposite of the United States, and reveals how the financing of the economy depends on the banking sector in Europe. As a result, capital markets in the euro area absorb 10% of shocks, and the credit channel around 34%.