ECB’s Coeure banking union could revive money markets

FRANKFURT, June 16: A European banking union could help revive money markets by restoring confidence in the creditworthiness of banks and governments, European Central Bank Executive Board member Benoit Coeure said.
Coeure, who is in charge of market operations on the ECB’s board, called for closer integration as ‘uncoordinated national reactions to heightened uncertainty could be collectively lethal to the single market for capital’.
The ECB is one of the main supporters of such a union, which would involve the introduction of a single European supervisory body, a pan-euro area deposit guarantee scheme and a resolution fund to wind down banks if necessary.
European Commission president Jose Manuel Barroso said he believed a banking union could be in place within a year, but European paymaster Germany says it will not support one unless it is preceded by fiscal union within the euro zone.
‘Restoring proper market functioning requires a series of actions to rebuild confidence in the creditworthiness of banks and governments, as well as the taking of decisive steps towards a banking union,’ Coeure said in a text of a speech released on Saturday and prepared for Morgan Stanley’s annual global investment seminar.
Money markets have been impaired since the onset of the financial crisis as banks began to lend less to each other in the market for fear of not getting their funds back, relying instead increasingly on central banks.
To ease such strains, the ECB injected more than 1 trillion euros into the banking system with twin 3-year loan operations in December and February, but there is growing concern that banks are becoming too reliant on central bank support.
‘Central bank intermediation of interbank funds was necessary to ensure a smooth transmission of monetary policy across the euro area and to avoid a major credit crunch. However, it may have come at the cost of crowding out some market activity,’ Coeure said.
A banking union could help revive the market by restoring trust among market players, Coeure said.
‘The adverse feedback loop between banks and sovereigns – in which doubts about the solvency of the sovereigns feed doubts about the solvency of the banks, and vice versa – will be broken more readily by the establishment of a true banking union,’ he said.
Coeure also said Europe’s permanent rescue fund, the European Stability Mechanism, should be able to inject capital directly into banks.
‘The emergence of truly pan-European banking institutions, provided they are properly controlled, would attenuate asymmetric shocks within member states and favour risk-sharing,’ Coeure said.
Another key aspect was to strengthen banks’ balance sheets and Coeure called upon regulators to make sure that banks would have sufficiently high capital buffers in place.
‘Leverage in the euro area banking system must be reduced. The aggregate leverage (asset-to-equity) ratio of large euro area banks remains comparatively high by international and historical standards,’ Coeure said.