Banking union and financial integration in
the European Union
Erkki Liikanen
Governor, Bank of Finland
Interparliamentary Conference on Economic and Financial
Governance of the European Union
Vilnius 17 October 2013
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Key messages
 When the financial markets are international and/or
integrated, the national supervision and resolution
mechanisms alone are not able to safeguard financial
stability.
 The banking union is needed to protect a sovereign from
weak banks, and to protect banks from a weak
sovereign.
 Financial integration is an essential element of the single
market. The door is left open for non-euro area member
states to join the banking union.
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The single market
 Mutual recognition
– freedom to sell services and to establish branches across
borders (single passport principle)
 Home country supervision
– cross-border activities and branches to be supervised by the
home country supervisor
 Minimum harmonization
– regulatory standards to be harmonized by Community legislation
• member states allowed to impose stricter standards.
– level playing field for the competition between financial firms
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The Single Currency
 Financial integration was regarded to be a prerequisite
for the smooth transmission of single monetary policy.
– the single currency was expected to make the goods and
services market more transparent intensifying competition and
thereby enhancing productivity.
 The Maastricht Treaty did not change the foundations on
which the single market for financial services had been
set
– in particular, the principle of home country supervision was not
challenged.
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The financial trilemma
National
supervision
and resolution
Dirk Schoenmaker, ”The financial
trilemma”, Economics Letters 111
(2011) 57–59.
Financial
integration
Safeguarding
financial stability
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Banking union
(Euro Area + opt-ins)
Single
Supervisory
Mechanism
Single
Resolution
Mechanism
Harmonised
deposit insurance
schemes
• Efficient
• Harmonised tools
• Investor/debtor
responsibility(bail-in)
• Industry
responsibility
(resolution funds)
• No bail-out
• Harmonised national
systems
• Industry responsibility
(funds)
• Supranational
• Uniform
• Close cooperation
with national
supervisors
Single Rulebook (all EU)
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Banking supervision
Resolution
Deposit insurance
• Efficient
• Supranational
• Uniform
• Harmonised tools
• Bail-in
• Resolution fund
• No bail-out
• Harmonisation
• Industry responsibility
(funds)
When this is properly done …
Bail-out of banks
• Expensive
• Politically loaded
• Case-by-case (ESM)
…the likelihood of this is
significantly reduced.
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Conclusions
 We need to create a financial landscape in Europe which
will contribute to the completion of the single market and
to financial stability.
 We need a financial system which will transmit monetary
policy more evenly across the euro area than is the case
today, when renationalization of finance hampers
European economic recovery.
 Some steps are politically difficult and require significant
structural and financial adjustments in the banking
sector. These obstacles are worth overcoming.
 More European supervision and more resilient banking
structure would only benefit Europe.
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Thanks
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