ECB's efforts in laying banking union foundations give reason for cautious optimism - Goldman Sachs

By | Updated July 30, 2014 AAA

FXStreet (Łódź) - The Goldman Sachs Economic Research team discuss the objectives of the Euro area banking union, to and its possible implications.

Key quotes

"Three objectives were identified: (1) making the Euro area financial sector more stable and resilient; (2) overcoming cross-country segmentation in Euro markets; and (3) providing a framework for dealing with legacy problems so as to credibly exit from the financial crisis."

"Two years after the announcement of banking union, the market environment has been transformed: fears of financial instability owing to expectations of the Euro’s demise have been replaced by market calm, a progressive tightening of spreads and improved bank funding conditions."

"For sure, credit creation remains weak and the recovery in the Euro area is fragile and anaemic. But systemic threats have receded."

"In part, improved market conditions reflect the credibility of policy announcements associated with banking union (complemented by various ECB interventions). But forward-looking markets have a tendency to overshoot fundamentals: current market pricing runs well ahead of the concrete development of the institutions of banking union."

"Much commentary on the emerging European banking union has been sceptical: the transition to a new common bank resolution fund is too slow; the ECB will have an incentive to fudge its balance sheet assessments to avoid destabilising current market calm, etc."

"Looking forward, it remains to be seen whether the relatively benign market environment will: (1) provide the ‘breathing space’ for institutional development to validate current market pricing; or (2) breed complacency, delaying reform and creating the threat of a market correction."

"In our view, the rigour of the ECB’s ongoing comprehensive assessment of bank balance sheets and the efforts to build the new single supervisor in Frankfurt give reason for cautious optimism."

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