A European Policy for the Banking Industry

The crisis has not only brought turmoil and uncertainty in monetary policy, it has also led to positive institutional innovations in central banking across the world. It is by now a foregone conclusion that financial stability is an objective of monetary policy in itself, which central banks need to pursue along with monetary stability. While financial stability has always been a preoccupation of central banks, the awareness about the scale and urgency of the problem has turned it into a pressing issue. In fact, over the last few years this new emphasis on stability and supervision has influenced the literature on monetary theory and the theory of monetary policy.

Before the crisis, there was hesitation about entrusting central banks with micro-prudential supervision, which means closely monitoring banks one by one. Now there is no more dithering about the issue, either in practice or theory. This is particularly true in the European Union, where the so-called Banking Union is about be born, with all the powers of oversight and supervision to be given to the ECB. This is an institutional revolution which will alter the balance and the relationship between monetary policy and banking supervision. If well managed, the Banking Union could be decisive in playing a major role in controlling the behavior of banks in Europe, as well as reducing the nervousness and excessive segmentation that make banks hoard liquidity and alter their propensity to risk. The union should be able to foster financial stability, by making the transmission of monetary policy more homogeneous and faster, from Frankfurt to the rest of the eurozone.

With banks regulated and supervised by central EU authorities, it will also be easier to conceive and implement a sort of "industrial policy" for the European credit industry. Such a policy should increase competition and favor the consolidation of banks whose size is too small, and conversely create disincentives for the growth of banks "too big to fail". It would also encourage the evolution of governance models and business strategies of European banks toward more transparency and competitiveness on the world stage. The authorities will be able to access, aggregate and disaggregate all the data concerning banks, and take the necessary measures to make them work efficiently and safely. European regulators will also be able to monitor how liquidity flows from the central bank to financial intermediaries, and then to the whole economy of the eurozone.

Clearly all the above is not going to happen as soon as the Banking Union officially comes into force at the end of 2014, as the process of unification will be completed gradually in the space of a few years. The interplay between monetary union and banking union will boost economic growth and promote fiscal and political innovation. When "bankers' secrets" are shared and disciplined by common centralized institutions, a major step has been made toward removing nationalistic barriers and jealousies. For instance, it will be politically easier to harmonize taxation and spending across the EU, as well as to issue EU debt, i.e. to issue so-called "eurobonds".

The political step taken with respect to banking supervision is equivalent to a crossing of the Rubicon:alea iacta est toward decisive progress in European integration. A European Union devoid of banking union risks being like a body where blood flows irregularly and is unable bring oxygen and nutrients where they are needed. With the banking union complementing the monetary union, it will be easier to acknowledge that Europe is a homogenous body politic, and if one organ is sick, the whole body suffers.