The euro area should start to create a banking union as part its monetary union to help put an end to the turbulence that has affected the 17-nations that share the euro currency, the European Central Bank said. In its bi-annual Financial Stability Review, the ECB called on member states to accelerate initiatives to strengthen the monetary union as fresh financial market pressures show there is no room for complacency in implementing changes. "There is now a need to go beyond these areas and conceive a banking union as an integral counterpart of Monetary Union. Such an endeavour would clearly take time to implement and could require legal changes," the ECB said. Banking union would achieve three critical objectives: Strengthen euro-wide supervision of banks and thus improve the conduct of monetary policy, break the linkage between banks and sovereigns by establishing a European deposit guarantee scheme and bank resolution arrangements, and lastly it would minimize the risk for taxpayers through contributions by the financial industry. The Review identified three key risks to financial stability: aggregation of the debt crises for euro area nations, lower bank profitability from weaker economic growth and an excessive pace of deleveraging of the banking sector. "There remains a clear need for a continued focus on tackling the root causes of the crisis, and a comprehensive response remains key to decisively ending a spiral of systemic risk augmentation," the ECB said, calling for policy implantation in five areas:
updated Jun 12, 2012
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