 As you've maybe heard from my bio, I'm actually, my background is macroeconomics and sort of monetary economics. But nowadays we all are banking experts too. But in fact it would be, it should be Ignacio Angeloni who is one of the key project managers of banking who should be here. But you can imagine that he's busy doing some other things. So that's why I'm here. It's a great pleasure to be here and I will be talking about towards the European Banking Union why, how and when. So the idea is to give a little bit of an overview of first of all where do we come from and why do we need to change things. Secondly, how are we going about implementing the European Banking Union and designing a European Banking Supervisor. And then thirdly, I want to also say a few words about the calendar ahead and issues related to the timing of reform which is never right but needs to be done in any case before concluding. So that's the plan and I hope I'll be able to stick to basically 22 to 30 minutes. Okay, so if you think about the Maastricht blueprint, it very much was a concept of a quite narrow monetary union where you had the single currency, the euro, an independent central bank with a clear objective of maintaining price stability close to below 2%. And operating monetary policy in an efficient integrated financial market and financial system with efficiently working in the bank market and efficiently working settlement and payment system. There was very little in terms of unifying fiscal policy, very little in terms of unifying some of the supply side policies. And at the beginning there were conflicting views on banking supervision where some of the fathers of EMU argued that it was important to also unify supervisory policies as a complement to monetary policy whereas others thought this was too much linked to fiscal policy to national politics and hence should remain decentralized. And I think the reasons for these different views were both political and intellectual. You can think of arguments on both sides. And so the treaty provisions basically provided for the possibility that the ECB would in general support national supervisory authorities, would contribute to financial stability. And of course importantly Article 127.6 which has now been used in order to give the ECB supervisory responsibilities already stated that the ECB may be assigned specific potential supervisory tasks by an anonymous council decision and that's indeed what has happened. Now I don't think I need to say much in this country about where we come from and how the problems arose, but let me just give you a very quick overview. I mean there were obviously clear skies, what looked like clearest skies until 2006. The changeover was technically seamless. There appeared to be movement towards more financial integrated markets. This was particularly seen in the interbank money market. Negligible sovereign bond spreads. Beginning of EMU also some cross-border bank mergers and acquisitions. And this of course was in the context of favorable global economic conditions. Credit booms in several euro area countries including this country. And sort of slowly building up competitiveness gaps, current account imbalances, which were not an issue because they were easily financed by private capital flows. But as often happens when the tide goes out you can see the rocks, right? When the capital flows turned around in part as a result of the global financial crisis. Then some of the fault lines of EMU, of this narrow concept of EMU became clear. This is just one graph that circulates the kind of the boom in capital flows from non-distressed euro area banks into the pink line here shows you the capital flows, the banking flows into distressed countries including Ireland and how it stopped in the second half of 2008. Now when that happened the national booms turned into busts. So on the left hand side here what you see is credit growth to the non-financial private sector split up again in distressed versus non-distressed countries and then for the euro area as well. And you see of course how there was a quite big difference in credit growth between the two regions so to say in the run up to the crisis. And then of course recently we have the reverse happening. So the deleveraging is going on much more strongly in the distressed countries relative to the non-distressed countries where credit growth is still slightly positive. This led to financial fragmentation which you also see in the short term interest rates on bank loan rates as you see where it's of course in the boom periods actually this shows Germany, France, Spain and Italy. The rates in Spain and Italy were on the low side relative to Germany. Of course after the bust and after financial fragmentation set in you get the opposite. One of the big causes of this fragmentation was what I guess is now commonly known as the so-called doom loop or the negative loop, the adverse loop between sovereign and banking risks. This graph basically gives you an illustration of that. It shows on the x-axis the price of sovereign risk as captured by credit default swaps and on the y-axis the price of basically banking risks as captured by credit default swaps. And the blue dots are basically the relationship in the United States whereas the red dots are the relationship in the Euro area. And you see how in the Euro area there was this very adverse interaction between the two types of risks. Of course initially particularly in countries like Ireland and Spain it was the banking risk that translated into sovereign risks because of the implicit liabilities of coming from resolving and restructuring banks. But then of course there was two-way feedback towards the banking sector because as sovereign risks increased also the asset side of banks where on average there's about 10% of the assets on banks in Euro areas well not 10%, I think it's less but at least in some countries it's up to 10% of the asset side is holding those sovereign bonds so if the sovereign risks increase then the asset side of banks is impaired and that leads then to an impairment also of capital adequacy. So this basically led to this negative loop between sovereign and banking risks and resulted again in this fragmentation of the financial market. So this is just one example where we show these cross-country standard deviation of insecure interbank lending rates in the Euro area for all countries that's the left-hand panel and for the non-distressed countries and you see the standard is much higher if you include the non-distressed countries. So again the banks that are located in the distressed countries have to pay much more for their short-term funding in the interbank market than those that do not. And you see the same thing in longer-term funding of banks so this is two other examples. The left-hand graph gives you spreads on senior unsecured debt for the Euro area average that's the middle so it gives you the blocks give you the variations across banks. The two on the right-hand side are France and Germany so in general much lower and on the left-hand side you have Italy and Spain again just for as an example again showing that funding costs were very much larger in the distressed countries than in the non-distressed countries and same is true for covered bonds which is... and of course this is not on effect on the real economy because also bank lending rates as I showed in a minute became fragmented. ECB of course has taken a number of measures to try to address some of that fragmentation probably the most important measure is the decision to have a full allotment of lending operations so banks when they have funding problems they can come with their collateral to the ECB and get funding from the ECB at a fixed rate and of course that has helped a lot in resolving those funding problems together with the fact that the maturity structure was lengthened in those long-term refinancing operations. So just to sum up in terms of what are the risks that we saw and what are the problems to be addressed there's basically three I would say the first one is to address this adverse loop between banks' public finances and macro-performance that was so dominant and so visible since the great recession broke out, the financial crisis broke out and the financial fragmentation that this led to. The second is to address some of the cross-border externalities and national biases in supervision which of course interacted and also led to financial fragmentation and of course there are a number of ways in which we've seen that going from under provision of national refunding of troubled cross-border banks because national authorities tried to shift some of the burden to the foreign authorities and as a result the problems are not resolved as quickly as maybe they should but also reversely incentives to ring-fence liquidity within national borders so supervisors even if their banking system is healthy they try to keep the liquidity within the system so that and again that leads to a fragmented money market and finally also incentives to generate demand for government debt through national banking systems so to address those cross-border externalities in supervision I mean the obvious way to solve that is to unify supervision so that a unified supervisor can take those externalities into account and take a cross-border or European perspective and then finally I mean more generally the fact that you still had national supervision and of course I mean there were initiatives to kind of harmonize the rulebook and of course the EBA was created relatively early on in the crisis to further to basically come up with a single rulebook in practice we still saw quite a bit of fragmented and ineffective banking supervision there are of course a number of initiatives that have been taken to try to address for example one of them is get the fiscal house in order this is not what I'm talking about here here I'm talking mostly about addressing this financial dilemma the fact that it has been shown to be incompatible to have national supervision systems and integrate the financial market and a single monetary union and this has led to basically the initiative by the governments by the European Council to push forward the idea of a banking union now as we all know the banking union basically has three blocks and I will be talking mostly about the first block which is the single supervisory mechanism which is a unified supervisory framework and authority but if you want to break the loop between banking risks and sovereign risks also the second and the third pillars will eventually have to be dealt with the second one being single resolution mechanism if bank is in trouble there has to be a European single resolution authority that deals with this to again address some of these externalities that otherwise arise and to also address the issue of burden sharing that arises in those cases and thirdly it will also be important eventually to have a harmonized deposit and even a single deposit guarantee scheme at this point the ambition is much less is basically to harmonize the deposit guarantee scheme these three pillars will be based on very important common rules where again there is still a lot of work to be done and a single rule book and a common supervisory practices which is really what a single supervisory mechanism the ECB is working on as we speak so it is these three pillars and let me now focus on the first one which is a single supervisory mechanism so the timing basically this is where we are up to now it started in June 2012 with the Euro area summit that launched the idea of the banking union then there was in September 2012 the commission's first draft December 2012 agreement in the EU council then the first half of this year agreement the trial agreement between the European Parliament, the council and the commission and then finally a couple of weeks ago in November the adoption of the SSM regulation and so now basically we can start full force implementing this looking forward there's two important next steps the first one is something that is foreseen in the SSM regulation which is a kind of a due diligence exercise if you take on, the ECB takes on new responsibilities in terms of supervising banks wants to make sure that it doesn't get all the bad apples so we have to deal with what's sometimes called the legacy assets and that is what the comprehensive assessment that some information of which was announced again two weeks ago very recently is all about this will be taking place basically from now till November next year and then in the years time in November 2014 the plan is to start operationally with the single supervision obviously the timing of all this is partly driven by what's going on in the crisis, partly driven by the political process but political agenda but it's also risky in terms of its interaction with the kind of incipient recovery that we're now facing so one of the challenges of managing this whole comprehensive assessment and then the start of the SSM will to make sure to do it in a way such that we do not endanger the recovery that we hope will continue over the next year okay let me then talk a little bit about the how so the SSM, the single supervisory mechanism or the ECB will have both micro supervisory tools and macro prudential tools I mean the micro supervisory tools are basically all the ones that national supervisors have so the ECB will have to decide on authorization and withdrawal of authorization of credit institutions it will have to give its okay on merchant acquisitions of qualifying holdings it of course will implement all the Basel III type of prudential requirements on capital adequacy large exposure limits on liquidity, leverage and disclosure internal governance and controls decisions on fit and proper of management and so on and so forth it will also do pillar two type of activities in Basel III so supervisory review stress tests which may lead to additional prudential requirements and of course one of the big advantages is that it will be able to take a consolidated approach a group level approach rather than a solo supervision in order to do all that it will apply of course the relevant union and national law and that's where again the EBA European Banking Association will play an important role in implementing the single rule book in the EU so which goes beyond the Euro area ECB will be able to conduct investigations on statistical and qualitative information do onsite inspections sanction banks and so on and so forth also apply early intervention tools so these will be the main powers now other policy areas, some other policy areas will remain at national level in particular supervision of non-banks for example insurance companies anti-fraud and consumer protection which is focused on micro-supervision of banks credit institutions in addition there will also be some macro-prudential tools the new supervisor will have but here the picture is a bit more nuanced in the sense that national authorities will remain the competent for national macro-prudential requirements for example implementing loan to value ratios will remain a national instrument but for those instruments that are currently in EU law in the capital requirement directive for example counter-cyclical buffers capital buffers and buffers for systemic important financial institutions there will be this kind of two level operations national authorities will have to will remain responsible for the use of those instruments and they will have to notify the intended decision to the ECB which may object and if this happens these national authorities will have to consider the ECB's reasons again important in order to ensure that there is some coordination in the application of those tools on the other hand the ECB will be able to apply more stringent macro-prudential measures so will be able to top up some of the national decisions if the national authority objects then the ECB has to consider its reasons so there is this kind of division of labour maybe that's not the right word between the ECB and the national authorities in this sense and the reason is mainly because of course macro-prudential policies the big advantage of them is that they can be granular they can be used to address where the financial systemic risks are building up which as we've seen often is locally and so it's good that the national or the local authorities can actually implement but on the other hand of course there are externalities there is issues of level playing field there is externalities that may affect other so there may be for example this under provision of or national authorities may sort of be reluctant to lean against booms if that means that sort of their financial sector will be disadvantaged relative to say other parts of the era so it's important to have also an important role of the ECB and of coordination geographical scope the single supervisor of course automatically includes all Euro area countries but there is a right to enter for the so-called outside the non-Euro area EU countries they can decide to join in what's called close cooperation by adopting the appropriate legislation and committing to abide to any guidelines or requests by the ECB which will also include that of course they have to provide all the information on its credit institutions that ECB may request and there are a number of sort of safeguards and rules that govern this interaction between the non-Euro area supervisors that decide or countries that decide to join the SSM and the decision making at the SSM which will be mostly Euro area decision making will be the governing council that ultimately decides in terms of institutional scope there's an important distinction to be made between so-called significant credit institutions and the non-significant credit institutions so the ECB will only directly supervise of course with the assistance of national authorities in the preparatory and implementing activities the significant credit institutions and here we have a number of criteria that are used to determine the basically 130 significant credit institutions that have been listed it's based on size so all banks greater than 30 billion or all banks whose asset to GDP ratio is greater than 20% of all financial institutions that on the direct financial assistance from the FSF will be under ECB supervision the three largest banks in each economy so for small economies that don't really have large banks ECB will still supervise the three largest banks in each country and the more generally ECB can decide to take under its supervision other banks that it deems to be important from a systemic matter so that will be the main scope institutional scope of the direct supervision but all 6,000 banks eventually fall under the responsibility all 6,000 banks in the Euro area will fall under the responsibility of the ECB however for those 6,000 minus 130 the national supervisory authorities will continue to supervise the banks and ECB will basically supervise the supervisors if you like so they will control this national supervision of course if there are issues that require attention then ECB can always decide to call a particular bank or a particular type of banks into its own direct supervision so that's the way that's kind of the stick that ECB has in order to ensure proper supervision by the national competent authorities that's the institutional scope okay I don't need to say much I think on the government's arrangement so there will be a supervisory board which will consist of one representative of each national banking authority participating member states it will consist of four representatives appointed by the ECB and the chair and the vice chair and we are now in the process of recruiting the chair which I think should be announced sooner rather than later and of course also hiring the senior management of the single supervisory mechanism there will be a steering committee about ten members which will prepare the meetings of the supervisory board and the supervisory board will basically take all supervisory decisions ultimately it's only the governing council that can take those decisions but the way it is structured also in order to separate the supervisory decision as much as possible from monetary policy decisions that normally ECB governing council will sort of wave through those decisions and only when it objects it will be able to bring back the issue to the supervisory board okay even on Euro-Area country disagrees the governing council confirms its objection then the country may notify the ECB that will not be bound to it again there are some safeguards for those countries that are not Euro-Area countries but decide to join in close cooperation okay of course just two institutional aspects first of all on the relation between supervision and monetary policy at ECB the regulation is clear that there should be separation between the two functions of the ECB and of course the separation should not be such that we cannot kind of reap some of the benefits of having supervision at the central bank the benefit being that central banks typically are very independent institutions therefore can sort of resist some of the political pressures that often arise in these fields and there are also natural places to handle financial stability because of their lender of last resort function expert knowledge of banking sector and so on and so forth but of course there are some risks in terms of conflicts of interest and in terms of financial risk so the way this will be handled is by clearly separate both functions in terms of objectives in terms of instruments in terms of communication will be very different communication platforms and tools and in terms of accountability related to accountability as you may know the ECB has entered into an institutional agreement with the European Parliament where it's laid out how the ECB will be accountable for its new tasks there's a number of aspects mentioned here of course there's financial independence all of the activities that the ECB will do as a supervisor will be financed by the banking system itself through supervisory fees again this is not something that's common in most countries so it's an area of harmonization but I think it's a quite important one there will be personal independence of members of the supervisory board and the steering committee there will be code of conduct there will be procedures to prevent conflicts of interest cooling off periods and so on and then more maybe equally importantly there will be control by the European Parliament so the European Parliament will be able to run investigations it has a say in the selection procedure of the chair and the vice chair and again this institutional arrangement basically lists the type of communication and reporting that the ECB will have to do to the European Parliament and in addition of course the ECB will also report to national parliaments the EU council and the commission okay I think I probably can skip this this is just sort of a quick summary of all the things that have been going on actually leading up to now the real implementation so there basically have been six important work streams where the current supervisors have worked together with the ECB to prepare all the material one important work stream was just mapping the area banking system just defining who the significant credit institution was a non-trivial exercise because we did not really have harmonized data on a consolidated basis second important work stream was legal issues relating to the framework regulation so now that legislation has been sort of published secondary legislation needs to be prepared I mean basically has been prepared and will be published I think by the end of this year so that's really about how the rules of procedure with which the ECB will implement the supervisory activities there is a work stream on the supervising model and supervising manual if you look across the system there's very different practices in terms of how banks are supervised and of course as with the ECB with monetary policy there has been an attempt to sort of try to take the best of all traditions and come up with a single supervisory model single supervisory manual data issues have been very important again one of the key success factors of good supervision is to have the information in a format that is efficient and effective this is the fourth work stream okay then there was a separate work stream to prepare an comprehensive review that I will quickly discuss in the next slide and then finally of course there's all the logistics of setting up basically a new organization which will be the same size almost as the ECB as it is now so basically doubling the staff we currently have about staff of 1,400 1,500 people at ECB it's planned that in the first step there will be 800 people directly working for the new supervisor 300 additional people for what we call the shared services which is the IT services the statistical services, legal services it's almost like double and of course setting up this organization in short time is also a challenge and important work stream again in all those areas we've been working basically over the past year ever since the push for banking union was given but of course with limited resources it's only now that we can go ahead full steam and actually hire, put the resources to work okay this is basically my last slide before concluding going forward a very important and probably the most important element of the route towards banking union is the so-called comprehensive assessment so this is kind of the due diligence of the banking sector in the euro area the objectives of this comprehensive assessment is to increase the transparency of the health of the banking system particularly the significant banks in the euro area to make sure that investors know what's going on in the banks to repair the balance sheets if it turns out that there's still some sort of hidden losses in some of those balance sheets and by doing so both to build confidence in the banking sector in the euro area so that banks can lower their funding costs that they can actually access if those that cannot or that have to pay big funding costs or high funding costs that they can again access the market at reasonable conditions and thereby build confidence and reduce the vulnerability of the banking system in the euro area there are basically three so it's comprehensive assessment and it consists of three pillars if you like the first one is a kind of top-down supervisory risk assessment so this will be basically at ECB we've been developing a risk assessment system which will allow us both from a quantitative and a qualitative perspective to make some judgements on key risk factors of each individual bank in terms of its business model in terms of its liquidity situation in terms of the leverage and the funding profile it has so that will be the first very important pillar and of course that risk assessment system will also be used by the SSM once we start in November 2014 the second important pillar and that's one element that has been discussed a lot for a while is the so-called asset quality review this is basically about going into detail into the books of banks and trying to see whether banks particularly for those assets that are of a more risky nature whether they perform the adequate standards in terms of the valuation of this risk in terms of providing loan losses in terms of the collateral that is being used for some of these assets and so on and so forth so this is assessment of data quality of asset valuations of classification of non-performing exposures of collateral valuation and provisions it is comprehensive in the sense that it covers both credit and market exposures and it will follow a risk-based targeted approach so each bank or each supervisor will have to give to the ECB basically rich assets amongst the most risky assets that for which then there will be an in-depth analysis including loan by loan or instrument by instrument analysis so obviously in the years time one cannot do a kind of a full assessment of the whole balance sheet so it will be kind of a targeted risk-based approach this will allow us to give kind of a sort of a better assessment of the current state so it's a point in time assessment basically it's the balance sheet at the end of this year that will be the starting point of that assessment it's a point in time assessment and then the third pillar will be the stress test and so this will be done in collaboration with the European Banking Authority and it's a forward-looking view on banks' shock absorption capacity and the stress so it will be a stress test that basically tests the bank's ability to survive or to be kind of resistant to a stress scenario ECB has given quite a bit of information on the asset quality review in a press release and a press conference two weeks ago the information on the stress test so far is still limited because basically the parameters have not yet been decided and this is being done together with the EBA because it will not only be your area banks that will be stressed or all other banks in the European Union the idea is that these three pillars basically will lead to a comprehensive judgement of each of those 130 significant banks I forgot to say that this comprehensive assessment is of the significant credit not of the 6,000 obviously that would not be possible and so the idea is that on the basis of these three pillars there will be a comprehensive judgement about a picture about the health of each of those banks and of course together with that there may be some measures that need to be taken if there is a shortage of capital or if there are some risks that need to be addressed then this comprehensive judgement will also be accompanied by measures to address those risks the idea is that this happens all before November 2014 so that in November 2014 the ECB can then start with the actual supervision of those 113 banks so basically this concludes my initial presentation so there's big opportunities with the implementation of banking union and a single supervisory system I think we will be able to break the bank fiscal interactions we will be able to address some of the national supervisory silos some of the home biases that we have seen we will be able to address some of the fragmentation and improve the single market and thereby help stabilize the euro what are some of the risks the most important risk is probably the fact that the two other pillars are not fully developed yet there's a commitment to do so so there's still a relatively weak crisis management framework which will have to be addressed national influences may initially exert an excessive influence on the system obviously all this has to be in a very short period of time to kind of build a European perspective it will take time and we will have to rely at least initially a lot on the national competent authority so to make this a smooth process will be a challenge although I must say that so far cooperation has been very productive and constructive and then of course the third risk is that there are transitional risk it has to be implemented in a very short time to set up the ECB we had four plus years now we have one year maybe more than one year to do a similar very complex operation so there's obviously transitional risks there could be early mistakes with reputational loss as a result but I guess we at ECB are trying to do everything we can to make it as effective as possible so that's basically my introduction