European banking union a most ambitious project', says Honohan

European banking union is “a most ambitious project” which has the enthusiastic support of the governor of the Central Bank, Patrick Honohan.

Speaking last night, he said the new union would help distance national politics from bank supervision and help bring about what he called “emotional detachment to the process of supervision”.

Addressing the opening of the second Garret FitzGerald spring school at University College Dublin, he hoped the banking union would be “effective in breaking the link between sovereign and banks, not only to protect the sovereign but to allow banks to operate effectively and have access to funding markets on a basis that is not subject to a sovereign risk-add on, but depends only on the bank’s own creditworthiness and standing”.

He paid warm tribute to the late Dr FitzGerald and his role in the development of the European project. Looking ahead, however, Prof Honohan hoped the banking union would lever the diversity of supervisory experience and aptitude across Europe to provide multiple cross-checks on bank soundness.

The creation of such a union was progressing at breakneck speed, he said, and he hoped the process would not get bogged down in complex layering of decision-making structures. He also hoped problems would not remain hidden by the dust of the creation of the new structures.

He stressed the need for a truly “communautaire” approach to a new banking union and warned that the move away from national decision-making structures can be a sensitive one that can lead to division among EU member states.

Politics and banking “don’t fit well together,” he warned, “yet they seem to have a magnetic attraction to one another”.

The best form of regulation capable of meeting the common good was one that was technocratic “and wholly insensitive to national, regional or local politics”.

“That can best be delivered by a regulator who lacks an understanding of, and interest in, such politics – outsiders will often fit this description very well,” he said. An even bigger challenge was the need to ensure emotional detachment between a new regulator and the banking system. He referred to what he saw as a pressing need to break the “pernicious feedback loop between sovereign and banks” and accepted there was a diversity of views as to how this would work. “What we can all agree upon in that the Irish syndrome cannot be allowed to recur,” he said.

“Even if it comes too late to avoid what happened in Ireland, the lessons of the Irish case will have helped protect other European countries in the next wave of crises, however far in the future they may be.” Any new system had to be streamlined and, despite the speed of its construction, was vulnerable to “operational risk” in the interim.