Buch urges banking union completion to secure financial stability
Claudia Buch, Chair of the Supervisory Board of the ECB, stated that the bank-sovereign nexus has weakened but urged the completion of the banking union to secure financial stability. Speaking at the AFME European Financial Integration Conference, she highlighted post-crisis reforms and future safeguards.
Two decades of progress, but vigilance needed
Almost two decades after the global financial crisis, the bank-sovereign nexus has weakened significantly, no longer posing an immediate prudential concern.
Reforms implemented post-crisis, including stronger regulation, supervision, and resolution powers, have been instrumental in this progress.
The shift from bailout to bail-in mechanisms, supported by industry-financed resolution funds, ensures that losses are borne by shareholders and creditors, not taxpayers.
Furthermore, bank balance sheets have substantially strengthened over the past decade, marked by improved asset quality and better capitalisation.
This enhanced resilience reduces the probability and severity of potential future crises.
However, the European Commission's ongoing review of the banking sector provides a crucial opportunity to solidify these gains and establish robust safeguards against future tightening of the nexus.
Completing the union, building resilience
Buch outlined two key safeguards to prevent the bank-sovereign nexus from re-tightening.
These include strengthening the institutional framework, completing the banking union, and establishing a European deposit insurance scheme.
The second safeguard is enhancing the banking sector's inherent resilience, especially given a more challenging geopolitical risk environment.
The speech detailed various channels linking banks and sovereigns, such as direct bank holdings of government bonds.
These bonds serve as collateral and liquidity buffers, and while holdings are stable relative to total assets, concentration risk is managed through supervision and Pillar 2 capital requirements.
Improved bank capitalisation also plays a stabilising role in sovereign bond markets, with home bias in portfolios decreasing since 2014.
Progress secured, but the last mile counts
While significant progress has been made in weakening the bank-sovereign nexus, the speech underscores that this stability is conditional on completing the banking union.
The continued reliance on national fiscal backstops for deposits and the lack of full risk-sharing leave the euro area vulnerable to future, unforeseen shocks.
Delaying the final steps, particularly a European deposit insurance scheme, risks undermining the hard-won resilience and could reintroduce systemic fragilities.