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Banking Union: restoring financial stability in the Eurozone

Banking union in a nutshell

Since the crisis started in 2008, the European Commission has worked hard to learn all the lessons from the crisis and create a safer and sounder financial sector. The Commission has proposed 28 new rules to better regulate, supervise, and govern the financial sector so that in future taxpayers will not foot the bill when banks make mistakes. Most of these rules are now in force or being finalised.

As the financial crisis evolved and turned into the Eurozone debt crisis in 2010/11, it became clear that, for those countries which shared a currency and were even more interdependent, more had to be done, in particular to break the vicious circle between banks and their national public finances. (See box 1)

That is why, in June 2012, Heads of State and Government agreed to create a banking union, completing the economic and monetary union, and allowing for centralised application of EU-wide rules for banks in the euro area (and any non-euro Member States that would want to join).

The new regulatory framework with common rules for banks in all 28 Member States, set out in a single rulebook, is the foundation of the banking union. Common rules will help to prevent bank crises in the first place (in particular Capital Requirements Directive and Regulation and, if banks do end up in difficulty, set out a common framework to manage the process, including a means to wind them down in an orderly way (Directive on Bank Recovery and Resolution (BRRD).

Common rules will also ensure that all EU savers are guaranteed that their deposits up to €100 000 (per depositor/ per bank) are protected at all times and everywhere in the EU. However, national DGS can be vulnerable to large local shocks. The Commission’s proposal for a European Deposit Insurance Scheme (EDIS) would provide a stronger and more uniform degree of insurance cover for all retail depositors in the banking union.

The banking union ensures the common implementation of those rules in the Eurozone. First, as of November 2014, the European Central Bank (ECB) will be the supervisor of all 6000 banks in the euro area in the framework of the Single Supervisory Mechanism.

In order to ensure that the ECB has a clear view of the situation of banks it supervises from the outset, a comprehensive assessment of banks’ financial health has been carried out. The ECB has confirmed that the balance sheets of the banks covered by its Comprehensive Assessment of 2014 are now sufficiently resilient, even under significant economic and financial stress.

Second, in the rare cases when banks fail despite stronger supervision, the Single Resolution Mechanism will allow bank resolution to be managed more effectively through a Single Resolution Board (SRB) and a Single Resolution Fund (SRF). If a bank fails, the SRM with clear decision-making rules for cross-border banks and highly experienced staff will be much more effective in carrying out resolutions than the existing patchwork of national resolution authorities.

Together with the new EU wide regulatory framework for the financial sector, the banking union is a big step in the economic and monetary integration of the EU. It will put an end to the era of massive bailouts paid for by taxpayers and will help restore financial stability. This, in turn, creates the right conditions for the financial sector to lend to the real economy, spurring economic recovery and job creation (see box 2).

Moreover, the Five Presidents’ Report of June 2015 sets out a number of steps to further strengthen European Monetary Union (EMU). One of them is to move towards EDIS as a further step to a fully-fledged Banking Union. EDIS would mark an important step towards reinforcing financial stability by further weakening the link between banks and their national sovereigns and by delivering even greater trust in the safety of retail bank deposits, regardless of a bank’s location in the Union. Ultimately, greater confidence in bank deposits would enable greater lending to the economy, meaning more growth and jobs for Europe.

The completion of the banking union will reinforce financial stability in EMU by restoring confidence in the banking sector through a combination of measures designed to both share and reduce risks.

How does the banking union create a safer banking sector in the Eurozone?

We are learning all the lessons of the crisis. And we now have a toolbox of measures to deal with banks comprehensively. We are:

• making all banks safer in the first place (crisis prevention),
• ensuring that if they do face problems, supervisors can intervene early to manage them (early intervention)
• and if the worst still happens, making sure that we have the tools in place to manage a crisis effectively (bank resolution).
• Moreover, the Commission’s proposal on EDIS would increase the resilience of the banking sector within the banking Union against future financial crises by reducing the vulnerability of national deposit guarantee schemes to large local shocks and further reducing the link between banks and their home sovereign.

To access the full document, click here

Courtesy of the European Commission