Banking union

Why a banking union?

The 2008 financial crisis and subsequent European sovereign debt crisis made it clear that Europe needed a banking union to make banks’ activities:

  • more transparent, by consistently applying common rules and administrative standards for the supervision, recovery and resolution of banks
  • more unified, by treating national and cross-border banking activities equally and by delinking the financial health of banks from the countries in which they are located
  • safer, by intervening early if banks face problems in order to help prevent them from failing, and – if necessary – by resolving banks efficiently

Foundations and benefits of banking union

The banking union is built on a foundation of common European regulations, known as the single rulebook, and has three components or “pillars”:

  • the Single Supervisory Mechanism (SSM)
  • the Single Resolution Mechanism (SRM)
  • the harmonisation and reinforcement of deposit guarantee schemes

One of the main benefits of banking union is that the underlying funding mechanisms for banking crises are financed by the financial sector and no longer by governments. These mechanisms include the Single Resolution Fund (SRF) and the deposit guarantee schemes. They coexist alongside the euro area’s direct bank recapitalisation instrument, the European Stability Mechanism (ESM).

Single rulebook

The single rulebook applies to all EU countries and forms the foundation of the banking union. It consists of a body of laws that must be complied with by all EU financial institutions.

This set of rules provides the legal and administrative standards to regulate, supervise and govern the financial sector in all EU countries more efficiently.

The single rulebook includes rules on capital requirements and prudential ratios, recovery and resolution processes and a system of harmonised national deposit guarantee schemes.

Single Supervisory Mechanism (SSM)

Adopted in October 2013 by the European Council, the SSM is the new system of European banking supervision and the first pillar of the banking union. It comprises the ECB and the national supervisory authorities of euro area countries and of other EU countries wishing to cooperate closely with the SSM. The aim of the SSM is to strengthen and harmonise prudential requirements for banks so problems can be resolved before they become critical.

Single Resolution Mechanism (SRM)

The SRM was proposed by the European Commission in 2013 and became fully operational on 1 January 2016. It is the second pillar of the banking union and implements the Bank Recovery and Resolution Directive or BRDD.

The SRM applies to banks covered by the SSM. It allows bank resolutions to be managed effectively through a Single Resolution Board and a Single Resolution Fund, which are both financed by the banking industry.

Single Resolution Board (SRB)

The SRB is the central resolution authority in the EU. It is responsible for ensuring that national resolution authorities execute appropriate resolution measures for failing banks. The SRB is a fully independent agency comprised of a Chair, a Vice-Chair and four permanent members appointed by the Council of the EU.

The SRB works closely with the national resolution authorities of participating countries, which are the first point of contact for banks within their jurisdiction. The SRB is in turn the main point of contact between the SRM and the ECB.

The SRB decides if and when resolution proceedings should be started for a failing bank. It then adopts an appropriate resolution scheme for the bank, consisting of effective resolution tools and, where necessary, the Single Resolution Fund.

Single Resolution Fund (SRF)

The SRF was set up on 1 January 2016 and is the banking union’s mechanism for financing bank resolutions. It is managed by the SRB and is used to provide financial support during bank restructurings.

The SRF is financed by contributions from credit institutions in participating EU countries, and from investment firms established in participating countries whose parent company is supervised on a consolidated basis by the ECB.

European Deposit Insurance Scheme

The third pillar of the banking union is the harmonisation and reinforcement of deposit guarantee schemes (DGSs). These are the systems set up in each Member State to protect depositors and prevent mass withdrawals of funds in the case of a bank failure, which can pose a risk to financial stability.

The adoption on 16 April 2014 of Directive 2014/49/EU of the European Parliament and of the Council on deposit guarantee schemes was an important milestone in efforts to enhance depositor protection, as it reduced repayment deadlines to seven days and required schemes to have available financial means of at least 0.8% of covered deposits. This framework was transposed into French law in August 2015.

In 2015, the European Commission published a legislative proposal for the establishment of a European Deposit Insurance Scheme (EDIS), which would be financed by banking sector contributions (risk-weighted). Then in 2017, it published a communication proposing the creation of a “hybrid” model comprising two successive phases:

  • Phase I: a re-insurance stage where national DGSs provide each other with liquidity support
  • Phase II: a co-insurance stage where national DSG losses are progressively mutualised

Technical discussions are still under way on the project.

In 2021, the Governor of the Banque de France called for a new scheme, combining “(i) the well-known idea of a liquidity support scheme between national DGSs –and obviously ensuring that each of them is funded as expected – with (ii) a renewed approach, in which foreign subsidiaries would be affiliated to the home DGS.”

Most importantly, the credibiltiy of any deposit guarantee scheme requires access to a solid financial backstop. In the case of the euro area, the Four Presidents’ Report on the strengthening of the economic and monetary union proposed that the European Stability Mechnism could act as a fiscal backstop to the resolution and deposit guarantee authority.

Capital markets union

Why a capital markets union?

The capital markets union (CMU) is one of the key elements of the European Commission’s strategy to boost employment, growth and investment. The aim is to foster economic growth and competitiveness by improving capital allocation within the union and giving businesses a greater choice of funding.

Foundations of the capital markets union

The European Commission launched its first CMU action plan in 2015, setting out 33 actions and measures that lay the foundations for a single European capital market. In 2020 it adopted a further plan putting forward 16 actions to speed up the emergence of a European CMU. This second plan is still being implemented.

The plan has three key objectives:

  • support a green, digital, inclusive and resilient economic recovery by making financing more accessible to European companies
  • make the EU an even safer place for individuals to save and invest long term
  • integrate national capital markets into a genuine single market

The Commission recently put forward legislative proposals for a European single access point (ESAP), the harmonisation of insolvency rules and the simplification of stock market listings.

Since 2021 it has also published annual indicators to monitor the impact of the reforms and measure progress in European capital market integration.

The role of the Banque de France in the CMU

The Banque de France fully supports the CMU project at all gatherings that it attends (notably Governing Council and ECOFIN Council meetings) and in public speeches by its representatives.

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Crisis management mechanisms

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International ecosystem

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Governance and advisory committees

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Crisis management mechanisms

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International ecosystem

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Governance and advisory committees

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