European Central Banks’ Stability Stretch

With longer-term EU debate swirling on common banking union twenty years after the “single passport” concept was introduced, research by the Polish central bank and New York-based Center for Financial Stability attempts to rank the 27 member individual supervisors’ current contribution to system protection and reporting. It divides the group into euro and non-euro users and devises an engagement index to measure analytical and infrastructure work beyond traditional monetary policy. Subcomponents include the definition and publication of financial stability reports, cooperation with ministries and parliament, and micro and macro prudential oversight to promote sector health and knowledge. Only the four representatives from France, Germany, Sweden and Latvia do not have this explicit legal mandate, which has usually been strengthened since the 2008 crisis and is described in both broad and narrow terms which can include asset bubble and non-bank contagion monitoring. Risk buildup can encompass numerous causes from negative economic shocks to participants unable to honor obligations. Just one-third of the group releases regular indicators following IMF methodology, although the same number provides their own statistics. Over half conduct and disclose the results of stress tests, with the highly ranked Czech National Bank assessing quarterly. Almost all circulate periodic stability reviews and bulletins, with Cyprus an exception which may have deterred earlier collapse notice spurring outside rescue and stiff depositor charges. Payments network and capital and liquidity rule responsibilities are routine but industry modernization and reform are often carried out with other government arms and indirect tasks like consumer rights may not be covered. The majority of central banks prefer a separate department for coordinating these issues working closely with the line regulators. Out of a maximum 10 score, the average was in the 7 range where the periphery countries now experiencing major stress congregated. Among the top ranked were Slovakia, Lithuania, and the Netherlands while France and Italy were the worst. The paper concludes that existing gaps complicate the challenge of launching the Single Supervisory Mechanism where the ECB may be stretched in its capacity and purview.

Sovereign debt restructuring is another topic where Europe may be preparing a different approach in view of difficulties with market-based procedures cited by both official and private parties during the Greek workout and subsequently in an April IMF Executive Board paper urging reconsideration of recent practice. A European crisis resolution facility established by treaty or EU directive has been urged as a continental version of the global SDRM proposal floated a decade ago to stiff opposition, and the existing ESM pact could be amended to address the power of holdout creditors who received full payment on foreign law bonds while the domestic ones were reduced 75 percent. The submission argues that relief has been “too little and late” and often continues unsustainability, and that collective action and official sector involvement problems remain unsettled.