|
|
This year we are celebrating the tenth anniversary of European banking supervision under the Single Supervisory Mechanism (SSM).[1] With the SSM and the banking union more broadly, Europe has demonstrated its ability to respond to crises in a united way – with greater harmonisation and integration rather than retreating to national solutions and fragmentation. A lot has been achieved in the past ten years in terms of enhancing resilience, reducing risks, and applying common rules and supervisory standards.
But these achievements pale in comparison to the transformation and integration witnessed in the Baltic region. Over the past 30 years, the Baltic states have gone through an unprecedented process of institution-building following the disintegration of the former Soviet Union. There has been a massive economic transformation in response to changes in relative prices and an almost complete reorientation of trade flows. Accession to the European Union and the adoption of the euro around ten years ago have been the most visible symbols of this transformation.[2]
Progress has been impressive. While the GDP per capita of the Baltic states was around one-third of the euro area average in the mid-1990s, it has now reached two-thirds.[3] In many areas, the Baltics are leading the way in terms of the digital transformation. They have attracted foreign direct investment, know-how and capital inflows. And their banking markets are closely integrated, in particular with the Nordic region.
But the Baltics have also experienced the downside of integration. In the run-up to the global financial crisis, inflows of capital fuelled a real appreciation of their currencies and an unsustainable credit expansion. When cross-border capital flows suddenly stopped, the region had to weather the storms of the global financial crisis, and it went through a painful recessionary period. Real wages declined and unemployment increased.[4] Flexibility in the real economy made it easier to adjust to changes in relative prices.
The Baltic experience holds important lessons.
First, financial integration and resilient banking systems make a key contribution to economic transformation. The entry of foreign banks into the Baltic countries has improved the quality of financial services and financed economic growth. Following the crisis, foreign-owned banks opted to remain in the region, rather than withdraw, contributing to the recapitalisation of the sector and facilitating the clean-up of balance sheets. Their shift from wholesale intragroup funding to more resilient local funding further supported the recovery.
Second, financial integration needs to be accompanied by strong and harmonised regulation and supervision. The post-crisis reforms and the creation of the banking union have made important contributions by establishing common rules and supervisory standards, introducing essential safeguards against the build-up of risk, and further enhancing trust in the financial system. The Baltic region has benefited greatly from these institutional changes.
Third, the digitalisation of financial services can further enhance financial integration and development, but it also demands robust safeguards to address associated risks. Digitalisation facilitates the cross-border provision of financial services, reducing the importance of regional proximity. While this brings many benefits, it also introduces risks through cyberattacks or money laundering, that must be addressed by banks. Moreover, the EU can make further progress in establishing a more secure foundation for financial integration. Among the key priorities, the European crisis management framework should be strengthened and a European deposit insurance scheme is needed to complete the banking union....
more at SSM