One step towards effective early intervention is the establishment of the Single Supervisory Mechanism (SSM). This will endow the ECB with the ultimate responsibility for specific supervisory tasks related to the financial stability of banks across the euro area. The need for a single supervisory mechanism arises from the increasing interconnectedness between financial institutions and financial markets across the euro area, such that problems that originate at a national level can quickly spread across national borders and imperil the entire European banking system. A central authority is better placed to spot these risks. However, the SSM framework alone will not be sufficient to successfully address significant threats to financial stability across the euro area, particularly in the light of the possibility of cross-border spill-over effects in the event of bank crises and the link between sovereign debt and bank debt. The European Commission has therefore identified the need for a banking union to strengthen the banking sector and restore confidence in the single currency, and this is projected as part of a longer term vision for economic and fiscal integration. Hence, the idea goes beyond the SSM or single-rule book. As President Van Rompuy points out in his report entitled Towards a genuine Economic and Monetary Union, the components of this integrated financial framework have to include not only bank supervision (as delivered by the SSM), but also bank resolution as well as bank deposit insurance.
However, the word “disproportionate” is very relevant, since it seems that some Eurosystem funding could be put to a better purpose than lying idle as deposits with the Eurosystem. For example, one possible use is to extend low cost credit for investments that promote restructuring and competitiveness and thus improve potential economic growth. For instance in the case of hotel upgrading or manufacturing restructuring to higher value added activities, banks could explore areas of growth that would benefit the economy and such niche markets could be kept distinct from existing uses of funds, to avoid cross-overs and refinancing of existing loans. The interest rates on such loans may be linked to the MRO rate, plus of course a margin for credit risk. This would provide a clear link to the provision of lower cost funding by the ECB and serve to break this apparent barrier in Malta of providing lower cost loans in tandem with ECB policy. On this issue of interest rate charges in Malta, it is somewhat paradoxical that despite the excess liquidity in the system, several institutions seem to be competing through higher deposit rates offered to customers. Competition is healthy and certainly depositors are better served by having such competition leading to higher returns. 2  6  ECB, Changes in bank financing patterns, April 2012.