European Central Bank Banking Supervision says bank sovereign nexus is no current prudential concern but urges banking union completion

In a speech at the AFME European Financial Integration Conference, Claudia Buch, Chair of the Supervisory Board of the European Central Bank, said the euro area bank-sovereign nexus has weakened and is not currently a prudential concern, but argued that the European Commission’s review of the EU banking sector should be used to secure that progress. She identified three safeguards: maintain strong supervisory and regulatory standards, close remaining resolution gaps by completing the banking union including a European deposit insurance scheme, and strengthen resilience in parts of finance outside the banking sector. The speech pointed to stronger bank balance sheets and crisis-management tools as evidence that post-crisis reforms have worked. Non-performing loans have fallen from close to 8% in early 2015 to about 2%, banks have largely met final MREL targets, and the Single Resolution Fund has reached about EUR 80 billion. But euro area banks still hold government bonds equal to 9.3% of total assets and 170% of CET1 capital, deposits remain largely domestic and rely on national guarantee schemes, and recent use of fiscal guarantees during the pandemic and energy shock showed how tighter fiscal space, geopolitical, trade, energy and cyber shocks could allow bank-sovereign linkages to tighten again.