Is the banking union good for banks?

The EU’s banking union is one of the main embodiments of European integration since the introduction of the common currency. Two of the banking union’s key pillars, the single supervisory mechanism and the single resolution mechanism, have already significantly increased trust in the financial sector.

For banks, the banking union has meant supervision that is stricter, more comprehensive and more systematic than before. On a national level, it has also left less room for interpretation in regulation. This has improved the financial sector’s stability.

Stricter supervision causes banks significantly more administrative work than before, especially in financial and risk management organisations. The European Central Bank’s (ECB) requests for information and reporting require banks to carry out extensive data collection projects, because supervision requirements have increased more quickly than banks have been able to develop their data systems. This has also considerably increased the cost of supervision. At OP Financial Group, the annual supervisory fees have almost tripled since 2012.

Problems may also arise as the ECB’s supervision extends past the evaluation of the legality of operations. The ECB assesses whether banks’ governance, risk management and financial position are at an adequate level, which may leave room for individual public officials’ subjective interpretation of what constitutes an adequate level.

Banks that have taken good care of their business must not end up paying for risks that materialise in problem banks.

The ECB is mandated to develop the single European rulebook, a task which it seems to take quite seriously. In part, the ECB’s heavy interpretations contradict with the EU’s political mindset, which emphasises the need to secure diversity in the European credit institution sector.

Europe would benefit from discussion about what it means to promote a diverse banking sector: what kinds of market participants do we wish to see in the sector?

The future of the banking union’s third pillar, the European deposit insurance scheme, remains uncertain. From the perspective of financial institutions, risk sharing must go hand in hand with risk reduction. The deposit insurance scheme would mean that risk sharing becomes considerably more extensive. Before we are ready for that, we must further reduce risks and solve the problems that banks continue to face, such as the relatively high number of non-performing loans and the major role banks play in funding their home countries’ public economy. Banks that have taken good care of their business must not end up paying for risks that materialise in problem banks.

Is the banking union good for banks? The heaviness of regulation and supervision is outweighed by the fact that European supervision is more credible than before. It enforces faith in the euro area, its economy and, above all, in the resilience of the financial system against crises. For banks to succeed, it is vital that the surrounding economy also succeeds.

This column is part of a Finnish-language publication that presents 16 questions and answers for the upcoming election seasons in Finland and EU.