Page 16 - EBA 2013.2869 Risk Assesment Report final proof4

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This divergent evolution between bank fund-
ing and lending is perturbing. Amongst other
inefficiencies, an increased cross-country
dispersion of lending rates has substantially
weakened capital allocation. Consequently,
firms face increasingly different credit sup-
ply and pricing conditions across countries
irrespective of their own profitability and
risk. Therefore, an immediate consequence
of market fragmentation has led to a short-
age of new lending to small and medium-
sized enterprises (SMEs), which in many
European countries are the main engine for
economic growth. These are clear signs of
significant inefficiencies across the EU sin-
gle market that need to be rectified.
Overall, the sovereign-bank linkage still per-
sists, despite the peripheral deposit flows
stabilisation as well as decreasing Target 2
imbalances and all the efforts developed so
far to decrease this linkage, with spreads
within the EU widening, including divergent
rates to real-economy comparable firms. In
addition, smaller banks are facing relatively
higher funding costs, cross-border lending
is still decreasing, and cross-border inter-
bank markets continue to be very subdued
and fragile in many jurisdictions, also con-
tributing among other reasons to a continu-
ing dependency of some banks on the cen-
tral banks’ liquidity providing operations.
Structural and institutional reforms at
European level
To bring fragmentation into a halt and
strengthen the single market, it is funda-
mental to press ahead with structural and
institutional reforms at European level, in
particular the banking union establishment,
including a Single Supervisory Mechanism
(SSM) and bank resolution schemes. In June
2012, the European Council decided that euro
area countries, and other Member States
that may wish to opt in, would create an SSM
mainly as a response to the banking and sov-
ereign crisis, and in December 2012 Ecofin
made specific progress in this direction.
More recently, in April 2013, the Council of
the European Union approved a compromise
agreed with the European Parliament on the
establishment of an SSM for the oversight
of credit institutions. The SSM, coupled with
other measures to drive further integration
such as the European Stability Mechanism
(ESM) and harmonised deposit guarantee
scheme(s) will be instrumental in breaking
the adverse bank–sovereign link and a major
step to promote the unity and integrity of the
EU single market.
Simultaneously, it is necessary to foster su-
pervisory convergence through a strong role
in supervisory colleges and through the devel-
opment of both the EU-wide Single Rulebook
and Supervisory Handbooks. The EBA contin-
ues to strongly support colleges of supervi-
sors as the proper forum for discussion and
agreement on appropriate supervisory meas-
ures for cross-border banking groups. At the
same time, the EBA will continue pursuing its
objectives in advancing towards an EU-wide
Single Rulebook and promoting regulatory
convergence across the Union, in both rules
and practices. The unity and integrity of the EU
single market could be achieved through uni-
form rules in key areas — the Single Rulebook
— and effective convergence in supervisory
practices within the EU as a whole.
0 %
20 %
40 %
60 %
80 %
100 %
There is correlation in market sentiment on your
bank’s debt and your home country’s sovereign debt
a. If yes:
 i. Very strong
 ii. Relatively strong
 iii. Loose
Jun 2013 — Agree
or somewhat agree
Dec 2012 — Agree
or Somewhat agree
Jun 2012 — Agree
or somewhat agree
Figure 4: Evidences of sovereign-bank linkage (
The length of the bars shows the percentage of respondents who agreed or somewhat agreed with the statement on the y-axis.