The Single Supervisory Mechanism monitors banking activity to increase the solidity of the financial system. It reduces the risk of banks’ crises, which are threats for the economic stability of the single States and the entire Union. Mainly, the SSM checks and guarantees that the Euro-Area banks have enough liquidity to absorb potential losses coming from wrong strategic decisions of the management or from crises.
On the other hand, the Single Resolutory Mechanism is applied when a bank is already facing a crisis or financial distress is considered very likely. The objective is to manage the bankruptcy of a single institute in the least harmful way for the financial system and the people. The SRM functioning has been conceived to increase responsibility in the banking system. Banks must manage carefully their financial resources, maintaining a sustainable level of exposure to risk. Besides, it is crucial for the regulators to avoid contagion effects, namely the risk that the bankruptcy of a bank affects the stability of other banks and institutions.
A debated element of SRM regulation is the so-called “bail-in” mechanism that does not allow to the State, except for special situations, to buy out banks that are close to default. Under “bail-in” regulation, when a bank is going bankrupt the costs of the failure is not only paid by the shareholders, bondholders too may be involved if necessary. A reason in favour of “bail-in” is that it encourages banks to be prudent, reducing hazardous behaviours of the management. Indeed, the achievement of high returns in investments requires a higher exposure to risk. This does not always lead to positive outcomes, but if someone, external to the bank, is available to cover the losses or save the bank in hard times, then the drawbacks will be less harmful. Management can be less worried about losses and bankruptcy risk. “Bail-in” works exactly against this inefficiency.
The main alternative is the “bailout”. In this case, the State would intervene, using taxpayers’ money to fix the bank management inefficiencies and mistakes. Some countries, Italy is an example, could have a dramatic growth of public debt because of “bailout”, especially if the default involves big national banks. Another possibility to solve the crisis of a bank is the Deposit Guarantee Scheme, a fund created collecting capital from all the banks of the system. In Italy, such a fund, the Fondo Interbancario per la Tutela dei Depositi (FITD), is used to cover the depositors from losses in case of bank distress. Depositors are covered up to 100,000 euro. Theoretically, tools of this sort could be used also to prevent catastrophic effects deriving from big banks’ failures.
Banking Union has faced many criticisms, especially raised by small and medium entrepreneurs, who blame it for the limited access to credit of these recent years. This is partially true. After the Basel agreements and the birth of SSM in 2014, banks have become more and more cautious in supplying credit. However, such inefficiencies are not completely ascribable to European regulation, for example, Italian banks were not always supplying credit in a transparent and trustworthy way. In 2015 in Italy, Non-Performing Loans (NPLs) (i.e. debts which are unlikely to be paid back) were as much as 16% of the total. The EU average is 3.4%. Moreover, 70% of these NPLs were distributed to 4.7% of debtors with an average value of 2.2 million euro per loan. Hence, small entrepreneurs have reasons to complain, the malfunctioning of the system is certainly not their fault.
However, it is important to stress that the drastic rules imposed on the banking system to increase capital reserves and creditworthiness’ standards have been crucial to increasing the solidity of the Italian economy. The failure of a bank causes damages to investors, depositors, entrepreneurs and (with “bailout”) also to taxpayers.
Finally, among the benefits of the banking union it is also worth mentioning the SEPA, Single European Payment Area, which involves 36 countries and allows to make bank transfers easily, only using the IBAN.
In conclusion, the banking union appears to be a source of advantages to the Italian economy much more than a cause of drawbacks. Restrictions are a requirement for stability, and recent history should have taught us that a stable banking and financial system should be preferred to one little regulated.
Michele Corio, Giovanni Sgaravatti
With special thanks to Beatrice Armanini