1. Banking union and financial integration in the European Union
Erkki Liikanen
Governor, Bank of Finland
Interparliamentary Conference on Economic and Financial Governance of the European Union
Vilnius 17 October 2013

2. Key messages
When the financial markets are international and/or integrated, the national supervision and resolution mechanisms alone are not able to safeguard financial stability.
The banking union is needed to protect a sovereign from weak banks, and to protect banks from a weak sovereign.
Financial integration is an essential element of the single market. The door is left open for non-euro area member states to join the banking union.

3. Home country supervision
The single market
Mutual recognition
freedom to sell services and to establish branches across borders (single passport principle)
Home country supervision
cross-border activities and branches to be supervised by the home country supervisor  
Minimum harmonization
regulatory standards to be harmonized by Community legislation
member states allowed to impose stricter standards.
level playing field for the competition between financial firms

4. The Single Currency
Financial integration was regarded to be a prerequisite for the smooth transmission of single monetary policy.
the single currency was expected to make the goods and services market more transparent intensifying competition and thereby enhancing productivity.
The Maastricht Treaty did not change the foundations on which the single market for financial services had been set
in particular, the principle of home country supervision was not challenged.

5. The financial trilemma
National
supervision
and resolution
Dirk Schoenmaker, ”The financial trilemma”, Economics Letters 111 (2011) 57–59.
Financial
integration
Safeguarding
financial stability

6. Single Rulebook (all EU)
Banking union
(Euro Area + opt-ins)
Single
Supervisory
Mechanism
Efficient
Supranational
Uniform
Close cooperation with national supervisors
Single
Resolution
Mechanism
Harmonised tools
Investor/debtor responsibility(bail-in)
Industry responsibility (resolution funds)
No bail-out
Harmonised
deposit insurance schemes
Harmonised national systems
Industry responsibility (funds)
Single Rulebook (all EU)

7. When this is properly done …
Banking supervision
Efficient
Supranational
Uniform
Resolution
Harmonised tools
Bail-in
Resolution fund
No bail-out
Deposit insurance
Harmonisation
Industry responsibility (funds)
When this is properly done …
Bail-out of banks
Expensive
Politically loaded
Case-by-case (ESM)
…the likelihood of this is significantly reduced.

8. Conclusions
We need to create a financial landscape in Europe which will contribute to the completion of the single market and to financial stability.
We need a financial system which will transmit monetary policy more evenly across the euro area than is the case today, when renationalization of finance hampers European economic recovery.
Some steps are politically difficult and require significant structural and financial adjustments in the banking sector. These obstacles are worth overcoming.
More European supervision and more resilient banking structure would only benefit Europe.

9. Thanks