The EU’s banking union: history and perspectives

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Among numerous sectoral “unions” within the European Union’s architecture there is one that affects citizens’ everyday’s life. It is the banking union that ensures that banks in the member states are strong and supervised in an efficient way. However, there are some differences in the EU’s banking union and the capital markets union.  

    The EU-wide banking union is a complex structure, which consists of numerous “building blocks”, such as e.g. supervisory mechanism, with a system for deposit guarantees and integrated crisis management framework; and a single supervisory mechanism, which has been regarded as a significant priority’s instrument. In response to the 2009 financial crisis, the Commission has established some measures to create a safer financial sector, which could form a single EU-wide rulebook to include the states’ financial institutions. They additionally included stronger prudential requirements for national banks, improved protection for depositors and rules for managing failing banks.
Reference: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/what-banking-union_en/

    There is a special Commission’s website devoted to complex “banking union” issues, which includes the following “regulatory items”: a) single supervisory mechanism, SSM which gives the European Central Bank certain supervisory tasks over the EU and the member states’ financial systems; b) single resolution mechanism, SEM, which serves as a central EU-wide institution for bank resolution in the member states; c) European deposit insurance scheme aimed to protect retail deposits in the banking union; and d) sovereign bond-backed securities, SBBS to remove unjustified regulatory impediments to securities’ development; it is a new financial instrument (from April 2019) which is assisting in reducing risk in the banking union by supporting further portfolio diversification in the banking sector.
More in: https://finance.ec.europa.eu/banking-and-banking-union/banking-union_en
On SBBS in: https://finance.ec.europa.eu/banking-and-banking-union/banking-union/sovereign-bond-backed-securities-sbbs_en

    As the consequences of the financial crisis for the eurozone have shown, a deeper integration of the banking systems was needed; therefore two EU-wide additional “unified mechanisms” have been established for banks, mainly for the eurozone with a voluntary participation of other states: a single supervisory mechanism, SSM (from 2017) and a single resolution mechanism, SRM (final version in 2019).
On supervisory mechanism in: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/single-supervisory-mechanism_en
On resolution mechanism in: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/single-resolution-mechanism_en
Additional references to: Commission Communication in: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52012DC0510; http://ec.europa.eu/internal_market/finances/policy/map_reform_en.htm

    Then, in November 2015, the Commission proposed a European deposit insurance scheme (EDIS), finally adopted after two years deliberations by the member states; the EDIS intended to provide a more uniform insurance system covering all retail depositors in the banks; the EDIS was regarded as the third pillar in the EU “banking union” system.
On EDIS in: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/european-deposit-insurance-scheme_en

    However, there were some problems in the banks that needed closer attention; they presented risks to the banking sector in the states, as the so-called non-performing loans (or “NPLs”, which are bank loans that are subject to late repayment or are unlikely to be repaid by a borrower), and sovereign bonds (so-called sovereign-bond-backed-securities, SBBS); in April 2019 the European Parliament endorsed the final agreement on the comprehensive set of reforms proposed by the Commission.
On NPLs in: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/managing-risks-banks-and-financial-institutions/non-performing-loans-npls_en
On sovereign bonds in: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/sovereign-bond-backed-securities-sbbs_en; and https://ec.europa.eu/info/publications/180524-proposal-sbbs_en

    To a certain degree, all three pillars of the banking union (SSM, SRM and EDIS) are now in place although the whole system is too complicated for the banks in the member states to be fully operational. For example, in the single supervisory mechanism it is the ECB which is responsible for supervising all banks; however, recent examples in the Baltic States’ banks (even relatively small ones) have shown that “difficulties” can have significant negative impacts on the financial stability of the member states. ECB exercises supervision of banks and credit institutions together with the national supervisors and the European Banking Authority, EBA.

    Global financial integration and the EU single market have enabled the banking sector in some member states to outgrow national GDP, resulting in institutions which are “too-big-to-fail” and “too-big-to-save” under existing national arrangements. On the other hand, experience shows that the failure of even relatively small banks may cause cross-border systemic damage. Furthermore, as soon as the bank “runs across borders”, that can critically weaken national banking systems, further damaging the fiscal standing of the sovereign and hastening funding problems for both.
The Commission has underlined, that a banking union should include a more centralized management of banking activities; the European Parliament has also called for progress in this area with the need for “common mechanisms to resolve banks and guarantee customer deposits”.
Hence, the ideas of supervisory and risk reduction measures have been adopted at the end of 2018.
More in: https://ec.europa.eu/info/publications/180606-report-banking-union-risk-reduction-measures_en/

Banking and capital markets unions
Meanwhile, the Commission sees the following perspectives in the banking union:
– adequate legislation for the practical implementation of the banking union;
– controlling transformation and implementation deposit guarantee schemes in the states, as well SMEs access to the credit institutions, prudential supervision of credit institutions and investment companies;
– creating a framework for the recovery and resolution of credit institutions and investment firms;
– increasing prudential supervision of credit institutions from the ECB’s side; and
– amending certain provisions of the EBA’s regulations.

    However, there are some differences in the EU’s banking union and the capital markets union. Thus, the EU-wide initiatives for a safer financial sector include the following directions: a) stronger prudential requirements for banks, b) improved protection for depositors, and c) rules for managing failing banks.
Whereas, the capital markets union is an idea of creating a single market for the “European capital” with the ultimate aim of “getting existing money” (i.e. investments and savings) flowing across the EU-27 states, so that this “flow” can benefit the member states’ consumers, investors and companies. Therefore, the capital markets union is supposed to: = provide businesses with a greater choice of funding at lower costs and provide SMEs in particular with the financing they need; = support the post-pandemic socio-economic recovery and increase employment; = offer new opportunities for savers and investors; = create a more inclusive and resilient national economy; = help Europe deliver its new “green deal” and digital agenda’s transitions; = reinforce the EU-wide global competitiveness and autonomy; and = make the whole EU financial system more resilient and stable.
More in: https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/capital-markets-union/what-capital-markets-union_en

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