Banking union

The banking union in the European Union is the transfer of responsibility for banking policy from the national to the EU level in several countries of the European Union, initiated in 2012 as a response to the Eurozone crisis. The motivation for banking union was the fragility of numerous banks in the Eurozone, and the identification of 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 sovereign debt as a result of banking system bailouts and government responses to slowing economies post-bubble. Banking union was formulated as a policy response to this challenge.

As of 2014, the banking union mainly consists of two main initiatives, the Single Supervisory Mechanism and Single Resolution Mechanism, which are based upon the EU's "single rulebook" or common financial regulatory framework. The agreement creating the SRM entered into force on 1 January 2016. As of January 2016, all eurozone member states participate in the SRM.

History

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 (such as the purchases of Abbey National by Santander Group, HypoVereinsbank by UniCredit and Banca Nazionale del Lavoro by BNP Paribas) 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.

The 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 April 17, 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 April 25, 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 May 23, 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 signaled a degree of convergence on this agenda when declaring on June 4, 2012, that European leaders "will also talk about to what extent we have to put systemically (important) banks under a specific European oversight".

Another milestone was the report delivered on June 26, 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 recapitalization 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 June 28–29, 2012. The summit's brief statement, published early on June 29, 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 the Single Supervisory Mechanism under the European Central Bank's authority, using Article 127(6) 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 recapitalization 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 recapitalization 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 recapitalization instrument that, as of September 2014, it has never been activated. However, the creation of the Single Supervisory Mechanism 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.

Etymology

Bruegel, a Brussels-based think tank, has been credited for popularizing both the concept and the expression of European banking union. The earliest public use of the expression "banking union" in the Eurozone crisis context is an article by Bruegel scholar Nicolas Véron in December 2011. This use 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. From April 2012, the expression was later popularized by the financial press, initially with reference to its use by Bruegel. From June 2012 onward, it was increasingly used in the public policy debate, including by the European Commission.

Single Rulebook

The single rulebook is the name used for the EU laws which 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 (also known as CRD IV; Regulation (EU) No 575/2013 of 26 June 2013; Directive 2013/36/EU of 26 June 2013) which implement the Basel III capital requirements for banks.
• Deposit Guarantee Scheme Directive (DGSD; Directive 2014/49/EU of 16 April 2014) which regulates deposit insurance in case of a bank's inability to pay its debts.
• Bank Recovery and Resolution Directive (BRRD; Directive 2014/59/EU of 15 May 2014) which establishes a framework for the recovery and resolution of credit institutions and investment firms found to be in danger of failing.

Single Supervisory Mechanism

Main article: Single Supervisory Mechanism

The Eurotower, future home of the European Central Bank supervisory staff

One pillar of the banking union is the Single Supervisory Mechanism (SSM), which would grant the European Central Bank (ECB) a supervisory role to monitor the implementation of the single rulebook and the financial stability of banks based in participating states.

Not all EU member states will participate in the SSM. Participation is automatic for eurozone states. Since the EU treaties only give the ECB jurisdiction over eurozone states, legally it cannot enforce measures in non-eurozone state. This would prevent the ECB from effectively carrying out its supervisory role in these states. However, the SSM allows for non-eurozone states to enter into a "close cooperation" agreement with the ECB to allow banks in that country to be supervised by the ECB provided that they have mechanisms in place to make ECB measures binding upon national authorities. A "close cooperation" agreement can be ended by the ECB or by the participating non-eurozone member state. Participating non-eurozone states will also gain a seat on the ECB's Supervisory Board.

While all banks in participating states will be under the supervision of the ECB, this will be carried out in cooperation with national supervisors. The most significant institutions, including those with holdings greater than 30 billion euros or 20% of the GDP of the state in which they are based, and those which have been directly funded by the European Stability Mechanism or European Financial Stability Facility, or have applied for such financing, will be directly supervised by the ECB. Smaller banks will continue to be directly monitored by their national authorities, though the ECB has the authority to take over direct supervision of any bank. The ECB's monitoring regime will including 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. However, if a bank is found to be in danger of failing, the responsibility for resolving it will rest with the Single Resolution Mechanism.

The SSM was enacted through two regulations which are titled:

• Council Regulation (EU) 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
• Regulation (EU) No 1022/2013 of the European Parliament and of the Council of 22 October 2013 amending Regulation (EU) No 1093/2010 establishing a European Supervisory Authority (European Banking Authority) as regards the conferral of specific tasks on the European Central Bank pursuant to Council Regulation (EU) No 1024/2013

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 Regulations on 12 September 2013, and the Council of the European Union gave their approval on 15 October 2013. The regulation set 4 November 2014 as the date when the ECB was to begin its supervisory role.

Single Resolution Mechanism

Main article: Single Resolution Mechanism

Signatories of the Agreement on the transfer and mutualisation of contributions to the Single Resolution Fund

The Single Resolution Mechanism (SRM) is a proposed pillar that would centrally implement the common rulebook's Bank Recovery and Resolution Directive in participating Member States, and would establish a Single Resolution Fund (SRF) to finance their restructuring.

The SRM would allow for troubled banks operating under the SSM to be restructured with a variety of tools including bailout funds from the centralized SRF, valued at 1% of covered deposits of all credit institutions authorised in all the participating member states (estimated to be around 55 billion euros), which would be filled with contributions by participating banks during an eight-year establishment phase. This would help to alleviate the impact of failing banks on the sovereign debt of individual states. The SRM would also handle the winding down of non-viable banks. The Single Resolution Board would be directly responsible for the resolution of significant banks under ECB supervision, while national authorities would take the lead in smaller banks.

Like the SSM, the SRM Regulation will cover all banks in the eurozone, with other states eligible to join. The text of the Regulation approved by Parliament stipulates that all states participating in the SSM, including those non-eurozone states with a "close cooperation" agreement, will automatically be participants in the SRM.

The SRM is planned to be enacted through a Regulation and an Intergovernmental Agreement (IGA) which are titled:

• Regulation of the European Parliament and of the Council establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Bank Resolution Fund and amending Regulation (EU) No 1093/2010 of the European Parliament and of the Council
• Agreement on the transfer and mutualisation of contributions to the Single Resolution Fund.

The proposed Regulation was put forward by the European Commission in July 2013. The Parliament and the Council of the European Union reached an agreement on the Regulation on 20 March 2014. The European Parliament approved the Regulation on 15 April, and the Council followed suit on 14 July 2014, leading to its entry into force on 19 August 2014.

The Intergovernmental Agreement (IGA) was signed by 26 EU member states on 21 May 2014, remaining open to accession by the remaining EU members Sweden and the United Kingdom. Its entry into force was conditional on the Agreement being ratified by states representing 90% of the weighted vote of SSM and SRM participating states. This was achieved on 30 November 2015, when all participating states apart from Greece and Luxembourg had ratified. Greece ratified on 7 December. The agreement entered into force on 1 January 2016 for SSM and SRM participating states. Luxembourg subsequently ratified on 11 January 2016.