42nd OeNB Economics Conference Discussing EU Banking Union

Reflecting the recent finalization of the legal framework for the EU banking union, this year’s Economics Conference of the Oesterreichische Nationalbank (OeNB) discusses the move “Toward a European Banking Union, Taking Stock.”

In his opening remarks, Ewald Nowotny, the OeNB’s Governor, addressed the impact of the EU’s banking union on economic policymaking, the banking industry and the economy at large. “Banking union is aimed primarily at breaking the nexus between government and banks.” The clear rules on bank resolution, which form one building block of the banking union, will help “sever the link between financial system instability and resulting threats to fiscal sustainability,” Nowotny said.

In light of the weaknesses in the banking sector that the crisis has exposed, the banking union has also been designed to support banks in fulfilling their economic role of supplying businesses and households with credit. Another area which the crisis revealed to be flawed is the institutional framework of the European banking markets, which continued to be regulated at the national level notwithstanding the far-reaching integration of the euro area financial market that had been achieved before the crisis emerged. The euro area-wide harmonization of banking supervision and potential bank resolution will ease the fragmentation of banking markets in the euro area. Banking union is expected to increase the efficiency of financial intermediation by banks above all in those euro area countries which were affected most by the sovereign debt and banking crisis and in which the low interest rates did not feed through to the customer level. Furthermore, thus Nowotny, “supervisors will also have to bear in mind the impact their actions have on the real economy.” The more stringent supervision of banks’ balance sheets must not compromise “banks’ willingness and ability to share the risks of the real sectors of the economy.”

Centralizing banking supervision at the European level constitutes a milestone in deepening and completing the euro area’s economic and institutional integration. Broadening the reach of the banking union to include other EU Member States beyond the euro area is mutually beneficial; therefore “it would be in the interest of all if as many countries as possible decided to join,” emphasized the OeNB governor.