Yves Mersch: Europe’s Banking Union Can Tackle the “Doom Loop”

Yves Mersch, executive board member of the European Central Bank

According to Yves Mersch, an executive board member of the European Central Bank (ECB), a banking union is the key to restoring and reviving troubled eurozone banks. At the Bridge Forum Dialogue in Luxembourg on 30 September, Mersch argued that such a union is the principal “cogwheel” in the plans to integrate the region’s economies, lenders, and fiscal policies.

“This crisis has shown that an economic and monetary union cannot function without a banking union,” he said. “We are now building one, from the ground up, to tackle the ‘doom loop,’ curb financial fragmentation, and enable banks to rebuild trust and provide a sustainable supply of credit to the real economy in every country and for every sector.”

On 29 August, Mersch laid out the blueprints for this banking union in a speech to the European Forum Alpbach 2013 titled “The Single Market and the Banking Union.” According to the plan, in 2014, the ECB will take over the supervision of all euro-area lenders, beginning with a three-phased analysis of the institutions coming under its jurisdiction. First, a risk review will be performed, followed by an analysis of bank balance sheets and stress tests conducted in collaboration with the European Banking Authority.

Once the banking union is in place, Mersch also believes that the ECB can suspend some of its non-standard crisis measures, such as giving banks unlimited amounts of longer-term cash. The approaching asset-quality review of eurozone banks also does not worry him. Mersch does not believe that southern European banks pose any threat to the overall stability of the region. He argues that it is unlikely, after so much scrutiny of southern banks, that a new review would uncover further issues. “Banks in the south… already have a lot of transparency operations behind them,” he said.

Mersch is confident that the ECB’s efforts toward unification will restore and revive the region’s banks. “For the ECB, an integrated banking space eases monetary policy transmission and the effectiveness of monetary policy,” he said.

At the Sixth Annual CFA Institute European Investment Conference, to be held in London on 14–15 November, Mersch will give the closing keynote speech on Europe’s future in the global economy. You can register to attend the conference and follow this blog for news and updates about the event.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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