It is a pleasure to be here this morning and to address this conference. I am grateful to the organisers for inviting me. It is actually an honour to stand here, in the leading European financial centre, in front of an audience convened by one of the largest and oldest banks in the country; older, in fact, than the United Kingdom itself.
In choosing my subject for today, I initially thought I should draw on my recent experience to describe the making of the banking union, and especially of its supervisory arm in Frankfurt. These are recent endeavours in comparison: the first anniversary of the Single Supervisory Mechanism (SSM) has just passed. But then I concluded that most of you would already be familiar with this. What is perhaps less known is the contribution that the UK has made to this project, in spite of its decision to stay out. I will come back to this shortly.
However, in doing so I should not lose sight of what lies ahead. European Union, banking union, United Kingdom: diverse as they are, these terms share the notion of unity. They remind us of decisions by large groups of people with diverse aspirations and interests to pool institutions and arrangements, convinced that together they would better achieve their goals. But now, the next step by the UK may well not be one of union, but one of separation. The European Union leaders recently reached an agreement addressing, among other issues, the future relation between the euro area and the UK. Soon the British people will decide. I will not enter into this political debate, but rather focus on the present state and prospects in the relation between the UK and the banking union, which share a single market and common institutions to support it. My point here is that the two banking systems are so closely intertwined, as are their underlying economies, that the success of one cannot easily be delinked from that of the other. The well-functioning of the European banking system as a whole requires constant and close cooperation among the prudential authorities. While such cooperation will be needed in any case, the EU provides a sound and tested basis for it.
Building an open and accountable SSM
Let me start by briefly recalling the initial phases of the banking union and how the UK and British nationals contributed to them in different ways.
In June 2012, the EU leaders asked the European Commission to produce, within a short deadline, a blueprint for an EU bank supervisory authority to be located within the European Central Bank. The summer that followed was an intense and exciting one for the Commission and for the ECB itself, which provided advice. Working at record speed, the Commission issued in September a detailed proposal for the charter of the new supervisor, built on global best practices but tailored to European needs. In retrospect that was a major success for both the Commissioner in charge and the staff involved, whose teams were led, I should mention here, by a Briton.
But that was only the beginning. The second step consisted in making the draft legislation accepted by all Member States. A specific task force was created within the Council. A main focus of the negotiation consisted in making sure that the Single Supervisory Mechanism, which would be hosted by the ECB and have its Governing Council as ultimate decision-maker, would adequately represent also the interests of non-euro countries, all potential members of the banking union. The solution eventually agreed upon is one that guarantees a high level of openness and balance among all participants. Supervisory decisions are fully prepared by a Supervisory Board, composed of heads of supervision of all countries in the banking union plus six representatives put forward by the ECB (including the Board’s Chair and Vice-Chair). The Governing Council adopts the supervisory decisions via a non-objection procedure. Possible divergences of views – which so far have not happened – are settled by recourse to a mediation panel, composed of members of the Governing Council and the Supervisory Board. The UK delegation, with contributions from both the Treasury and the Bank of England, played a considerable role in the agreement. In the end, the regulation was approved, with significant but not radical amendments, by the ECOFIN in December 2012.
The third and final step was the passage through the European Parliament. Lawmakers were naturally concerned, among other things, about the democratic accountability of the new authority. The result of the process was an inter-institutional agreement between the Parliament and the ECB, in which several forms of accountability are foreseen, including regular hearings before the European Parliament's Committee on Economic and Monetary Affairs (ECON), confidential exchanges of views on topical issues and the transmission of the records of proceedings of Supervisory Board meetings to Parliament. In my opinion these provisions constitute, in international comparison, one of the most – if not the most – advanced example of accountability for a banking supervisor. I personally remember some of the intense meetings in which those provisions were discussed and agreed with the ECON. This Committee was chaired at the time – you must have guessed by now! – by another British national.
Clearly, these contributions came in some cases from individuals whose nationality was a coincidence and who were acting within their institutional roles. But I can witness that those individuals brought to the negotiating tables some of the best and most characteristic British traits: openness to debate, respect for valid arguments, pragmatism, and a strong sense of democratic legitimacy.
Regular forms of microprudential and macroprudential cooperation
Let me now describe how supervisory cooperation between the SSM and the UK authorities works in practice. I will limit myself to European arrangements, leaving aside global groupings like the Financial Stability Board and the Basel Committee on Banking Supervision, which however also offer frequent occasions of encounter and exchange.