European banking union
The European banking union refers to the transfer of responsibility for banking policy from the member state-level to the union-wide level in several EU member states, initiated in 2012 as a response to the 2009 Eurozone crisis. The motivation for the banking union was the fragility of numerous banks in the Eurozone, and the identification of a vicious circle between credit conditions for these banks and the sovereign credit of their respective home countries. In several countries, private debts arising from a property bubble were transferred to the respective sovereign as a result of banking system bailouts and government responses to slowing economies post-bubble. Conversely, weakness in sovereign credit resulted in deterioration of the balance sheet position of the banking sector, not least because of high domestic sovereign exposures of the banks.
As of mid-2020, the Banking union of the European Union largely consists of two main initiatives, European Banking Supervision and the Single Resolution Mechanism, which are based upon the EU's "single rulebook" or common financial regulatory framework. The SSM took up its authority on 4 November 2014, and the SRM entered into full force on 1 January 2015. Most accounts of banking union view it as incomplete in the absence of a European deposit insurance. The European Commission made a legislative proposal for a Deposit Insurance Scheme in November 2015, but it has not been adopted by the EU co-legislators.
Until October 2020 and starting again from January 2026, the geographical scope of the European Banking Union is identical to that of the euro area. Other non-euro member states may join the European Banking Union under a procedure known as close cooperation. Bulgaria and Croatia initiated requests for close cooperation, in July 2018 and May 2019 respectively. Following a formal approval of these requests in June 2020, the European Central Bank started supervising the larger Bulgarian and Croatian banks on 1 October 2020.
In December 2023 Italy's lower house of parliament voted against reforming the euro zone bailout fund ESM preventing parliament from approving the same reform text in the six months to come, and blocking implementation of the Single Resolution Mechanism.
Name
The earliest recorded public use of the expression "banking union" in the Eurozone crisis context was in an article by scholar Nicolas Véron published near-simultaneously by Bruegel, the Peterson Institute for International Economics and VoxEU.org in December 2011. It paralleled the earlier advocacy of fiscal union by various observers and policymakers in the same context, especially in Germany in the second half of 2011. According to Véron, the expression had been suggested to him by European Commission official Maarten Verwey. From April 2012, the expression was later popularised by the financial press, initially with reference to its use by Bruegel scholars. From June 2012 onward, it was increasingly used in the public policy debate, including by the European Commission.Background and formation
The integration of bank regulation has long been sought by EU policymakers, as a complement to the internal market for capital and, from the 1990s on, of the single currency. However, powerful political obstacles including the willingness of member states to retain instruments of financial repression and economic nationalism led to the failure of prior attempts to create a European framework for banking supervision, including during the negotiation of the Maastricht Treaty in 1991 and of the Treaty of Nice in 2000. During the 2000s, the emergence of pan-European banking groups through cross-border mergers and acquisitions led to renewed calls for banking policy integration, not least by the International Monetary Fund, but with limited policy action beyond the creation of the Committee of European Banking Supervisors in 2004.Deterioration of credit conditions during the Eurozone crisis, and specifically the contagion of financial instability to larger member states of the euro area from the middle of 2011, led to renewed thinking about the interdependence between banking policy, financial integration, and financial stability. On 17 April 2012, IMF managing director Christine Lagarde renewed the institution's earlier calls for banking policy integration by specifically referring to the need for the euro monetary union to be "...supported by stronger financial integration which our analysis suggests be in the form of unified supervision, a single bank resolution authority with a common backstop, and a single deposit insurance fund." The following week on 25 April 2012, European Central Bank President Mario Draghi echoed this call by noting in a speech before the European Parliament that "Ensuring a well-functioning EMU implies strengthening banking supervision and resolution at European level". Suggestions for more integrated European banking supervision were further discussed during an informal European Council meeting on 23 May 2012, and appear to have been backed at the time by French President François Hollande, Italian Prime Minister Mario Monti, and European Commission President José Manuel Barroso. German Chancellor Angela Merkel signalled a degree of convergence on this agenda when declaring on 4 June 2012, that European leaders "will also talk about to what extent we have to put systemically banks under a specific European oversight".
Another milestone was the report delivered on 26 June 2012, by European Council President Herman Van Rompuy, which called for deeper integration in the Eurozone and proposed major changes in four areas. First, it called for a banking union encompassing direct recapitalisation of banks by the European Stability Mechanism, a common financial supervisor, a common bank resolution scheme and a deposit guarantee fund. Second, the proposals for a fiscal union included a strict supervision of eurozone countries' budgets, and calls for eurobonds in the medium term. Third, it called for more integration on economic policy, and fourth, for the strengthening of democratic legitimacy and accountability. The latter is generally envisioned as giving supervisory powers to the European Parliament in financial matters and in reinforcing the political union. A new treaty would be required to enact the proposed changes.
The key moment of decision was a summit of euro area heads of state and government on 28–29 June 2012. The summit's brief statement, published early on 29 June, began with a declaration of intent, "We affirm that it is imperative to break the vicious circle between banks and sovereigns," which was later repeated in numerous successive communications of the European Council. It followed by announcing two major policy initiatives: first, the creation of European Banking Supervision under the European Central Bank's central authority, using Article 127 of the Treaty on the Functioning of the European Union; and second, "when an effective single supervisory mechanism is established," the possibility of direct bank recapitalisation by the European Stability Mechanism, possibly with retroactive effect in the case of Spain and Ireland.
In the following weeks, the German government quickly backtracked on the commitment about direct bank recapitalisation by the ESM. In September 2012, it was joined on this stance by the governments of Finland and the Netherlands. Eventually, such conditions were put on the ESM direct recapitalisation instrument that, as of September 2014, it has never been activated. However, the establishment of European Banking Supervision proceeded apace. Furthermore, in December 2012 the European Council announced the creation of the Single Resolution Mechanism. Europe's banking union has been identified by many analysts and policymakers as a major structural policy initiative that has played a significant role in addressing the Eurozone crisis.
Single Rulebook
The single rulebook is a name for the EU laws that collectively govern the financial sector across the entire European Union. The provisions of the single rulebook are set out in three main legislative acts:- Capital Requirements Regulation and Directive, which implements the Basel III capital requirements for banks.
- Deposit Guarantee Scheme Directive, which regulates deposit insurance in case of a bank's inability to pay its debts.
- Bank Recovery and Resolution Directive, which establishes a framework for the recovery and resolution of credit institutions and investment firms in danger of failing.
European Banking Supervision
While all banks in participating states will be under the supervision of the ECB, this is carried out in co-operation with national supervisors. The banking groups designated by the SSM as "significant institutions", including all those with assets greater than 30 billion euros or 20% of the GDP of the member state where they are based, are directly supervised by the ECB. Smaller banks, known in the banking union as "less significant institutions", remain directly monitored by the national supervisory authorities of the member state in which they are established, even though the ECB has indirect supervisory oversight and also the authority to take over direct supervision of any bank. The ECB's monitoring regime includes conducting stress tests on financial institutions. If problems are found, the ECB will have the ability to conduct early intervention in the bank to rectify the situation, such as by setting capital or risk limits or by requiring changes in management.
The SSM was enacted through Council Regulation No 1024/2013 of 15 October 2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions, known as the SSM Regulation. Significantly, since this EU Regulation is based on Article 127 TFEU, it was adopted by unanimity of the Council, with only a consultative role for the European Parliament. To secure the consent of the United Kingdom, however, it was critical to simultaneously adopt a reform of the EBA Regulation of 2010 No 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending Regulation No 1093/2010 establishing a European Supervisory Authority as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation, which in practice gave the European Parliament a veto and thus a significant role in the legislative process. Any future modification of the SSM Regulation may also require unanimity of the council.
The European Commission released their proposal for the SSM in September 2012. The European Parliament and Council agreed on the specifics of the SSM on 19 March 2013. The Parliament voted in favour of the SSM and EBA Regulations on 12 September 2013, and the Council of the European Union gave their approval on 15 October 2013.
As set in the SSM Regulation, the ECB assumed its supervisory authority on 4 November 2014.