European Central Bank President Mario Draghi said Wednesday that a banking union can lead to stronger financial integration in the Eurozone, but questions about how to pay for the resolution of failing banks need to be resolved.
“My view is that the incomplete financial integration we achieved before the crisis made it susceptible to fragmentation,” Draghi told a conference in Brussels.
“But I am confident that with a banking union we can create the pre-conditions for more sustainable financial integration in the future,” Draghi added.
Draghi said the Single Supervisory Mechanism would allow supervisors to better identify and deal with emerging risks. It would also substantially ease the regulatory burden faced by cross-border banks.
But Draghi said that uncertainties in the financing of the Single Resolution Mechanism for ailing banks need to be dealt with.
If such uncertainties are not removed, markets “may find themselves having to price-in a residual risk of national government involvement, thus perpetuating the bank-sovereign nexus,” he said.
One issue, Draghi said, is that 10-year time period planned to create a single resolution fund seemed “unduly long.” He said the pace of mutualization should be limited to five years. “The fund would still only reach its target level after 10 years, yet it would be a truly single fund after five years,” Draghi added.
Backstop arrangements while the fund is being built up also need to be clarified, Draghi said.
“We believe that a single resolution fund needs a solid public backstop – be it an ability to temporarily borrow from the market backed by guarantees from participating member states, or access to a credit line, potentially from the European Stability Mechanism,” Draghi said.
He said such borrowing could be recovered by additional levies on the banking sector and thus would not represent a transfer system between taxpayers.