4. The origin and developments of modern central banks are closely
linked to key changes undergone by monetary systems over the past two
centuries. Such changes could, very sketchily, be summarised as follows.
First, paper currency established itself as a more convenient means of
payment than commodity currencies. Second, commercial bank money (bank
deposits) spread as a convenient substitute for banknotes and coins. Third,
the quantity of money was disconnected from the quantity of gold. Thus, a
double revolution in the technology of the payment system, the advent of
banknotes and that of cheques or giros, has shaped the functions that most
central banks performed over this century: monetary policy and prudential
supervision. Man-made money made monetary policy possible. The fact that a
large, now a predominant, component of the money stock was in the form of
commercial bank money made banking supervision necessary.
Ensuring confidence in the paper currency and, later, in the stability of the relationship, one could say the exchange rate, between central bank and commercial bank money, were twin public functions, and, in general, they were entrusted to the same institution. Just as money has three well-known economic functions - means of payment, unit of account and store of value - so there are three public functions related to each of them. Operating and supervising the payment system refers to money as a means of payment; ensuring price stability relates to money as a unit of account and a store of value; and pursuing the stability of banks relates to money as a means of payment and a store of value. In each of the three functions commercial banks have played, and still largely play, a crucial role.
In an increasing number of countries the original triadic task
entrusted to the central bank has now been abandoned in favour of a
"separation approach", according to which banking supervision has been
assigned to a separate institution. Following the recent adoption by the
United Kingdom and Luxembourg of the separation approach, only two of the
12 countries represented in the Basle Committee on Banking Supervision
(Italy and the Netherlands) have the central bank as the only authority
responsible for banking supervision. In all systems, however, whether or
not it has the task of supervising the banks, the central bank is deeply
involved with the banking system precisely because the banks are primary
creators of money, providers of payment services, managers of the stock of
savings and counterparties of central bank operations. No central bank can
ignore the need to have a concrete and direct knowledge of "its" banking
system, i.e. the banking system that operates in the area of its monetary
jurisdiction.
Personally, I have an intellectual attachment to, as well as a
professional inclination for, the central bank approach to banking
supervision, due partly to the fact that I spent most of my professional
life in a central bank which is also to this day the banking supervisor.
Yet I can see, I think, the arguments that have led a growing number of
industrialised countries to prefer the separation approach. Such arguments
basically point to the potential conflict between controlling money
creation for the purpose of price stability and for the purpose of bank
stability. On the whole, I do not think that one model is right and the
other wrong. Both can function, and do function, effectively; if
inappropriately managed, both may fail to satisfy the public interest for
which banks are supervised.
5. Against this background, let me now describe the institutional
framework currently adopted by the Treaty. As my description will refer to
the area in which both the single market and the single currency are
established, it will not specially focus on the problems of the so-called
"pre-in" countries, including the United Kingdom.
The current institutional framework of EMU (i.e. the single market plus the single currency) is a construct composed of two building blocks: national competence and co-operation. Let me first briefly review the main aspects of these two building blocks and then see how the Eurosystem relates to them.
First, national competence. In a market based on the minimum harmonisation and the mutual recognition of national regulatory standards and practices, the principle of "home country control" applies. According to this principle every bank has the right to do business in the whole area using a single licence, under the supervision, and following the rules, of the authority that has issued the licence. The full supervisory responsibility thus belongs to the "home country". This allows, inter alia, the certain identification of the supervisor responsible for each institution acting as a counterparty to the monetary policy operations of the Eurosystem. The only exception to this principle - the "host country" competence for the supervision of liquidity of foreign branches - is no longer justified now that the euro is in place; hence it should soon be removed.
Second, co-operation. In a highly regulated industry such as banking, a single market that retains a plurality of "local" (national) supervisors requires close co-operation among supervisors to safeguard the public good: namely, openness, competition, safety and soundness of the banking industry. EU directives (the 1st and 2nd Banking Directives and the so- called BCCI Directive) lay the foundations for such co-operation, but they do not contain specific provisions or institutional arrangements to this end. They limit themselves to stating the principle of co-operation among national authorities and to removing obstacles to the exchange of information among them.
6. How does the Eurosystem relate to this construction? Essentially
in two ways. First, the Treaty assigns to the Eurosystem the task to
"contribute to the smooth conduct of policies pursued by competent
authorities relating to the prudential supervision of credit institutions
and the stability of the financial system" (Article 105 (5)). Given the
separation between monetary and supervisory jurisdictions, this provision
is clearly intended to ensure a smooth interplay between the two. Second,
the Treaty gives the Eurosystem a twofold (consultative and advisory) role
in the rule-making process. According to Article 105 (4), the ECB must be
consulted on any draft Community and national legislation in the fields of
banking supervision and financial stability; and, according to Article 25
(1) of its Statute, the ECB can provide, on its own initiative, advice on
the scope and implementation of the Community legislation in these fields.
It should be borne in mind that central banks are normally involved in the
process of drawing up legislation relating to, for example, regulatory
standards, safety net arrangements and supervision since this legislation
contributes crucially to the attainment of financial stability.
7. Two observations should be made about the institutional framework just described. First, such an arrangement establishes a double separation between central banking and banking supervision: not only a geographical, but also a functional one. This is the case because for the euro area as a whole banking supervision is now entrusted to institutions that have no independent monetary policy functions. The separation approach that was chosen for EMU has effectively been applied not only to the euro area as a whole, but to its components as well. Indeed, even in countries where the competent authority for banking supervision is the central bank, by definition this authority is, functionally speaking, no longer a central bank, as it lacks the key central banking task of autonomously controlling money creation.
The second observation is that the Treaty itself establishes (in
Article 105 (6)) a simplified procedure that makes it possible, without
amending the Treaty, to entrust specific supervisory tasks to the ECB. If
such a provision were to be activated, both the geographical and the
functional separation would be abandoned at once. The fact that the
Maastricht Treaty allows the present institutional framework to be
reconsidered without recourse to the very heavy amendment procedure
(remember that such procedure requires an intergovernmental conference,
ratification by national parliaments, sometimes even a national referendum)
is a highly significant indication that the drafters of the Treaty clearly
understood the anomaly of the double separation and saw the potential
difficulties arising from it. The simplified procedure they established
could be interpreted as a "last resort clause", which might become
necessary if the interaction between the Eurosystem and national
supervisory authorities turned out not to work effectively.
III. INDUSTRY SCENARIO
8. When evaluating the functioning of, and the challenges to, banking
supervision in the current institutional framework, two aspects should be
borne in mind. First, the advent of the euro increases the likelihood of
the propagation of financial stability problems across national borders.
For this reason a co-ordinated supervisory response is important at an
early stage. Second, the sources of banks' risks and stability problems
depend on ongoing trends that are not necessarily caused by the euro, but
may be significantly accelerated by it. On the whole, we are interested not
so much in the effects of EMU or the euro per se, as in the foreseeable
developments due to all factors influencing banking in the years to come.
9. It should be noted at the outset that most banking activity, particularly in retail banking, remains confined to national markets. In many Member States the number, and the market share, of banks that operate in a truly nationwide fashion is rather small. Although banks' international operations have increased, credit risks are still predominantly related to domestic clients, and the repercussions of bank failures would be predominantly felt by domestic borrowers and depositors.
10. Assessing the internationalisation of euro area banks is a complex task because internationalisation can take a number of forms. One is via cross-border branches and subsidiaries. Although large-scale entry into foreign banking markets in Europe is still scarce, reflecting persisting legal, cultural and conduct-of-business barriers (less than 10% on average in terms of banking assets in the euro area; Table 1), there are significant exceptions. The assets of the foreign branches and subsidiaries of German and French banks account for roughly a third of the assets of their respective domestic banking systems (Table 2). The Dutch banking system is also strongly diversified internationally.
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