Completing the Banking Union – a never ending story?

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The Banking Union (BU) is an essential part of the Economic and Monetary Union (EMU) as it decisively contributes to financial market stability and growth. Both aspects are vital for German industry. But the implementation of the key elements of BU have advanced at different paces and are subject of controversial debate.

One of the lessons learnt from the financial crisis of 2009 is that the European banking system is vulnerable to systemic shocks. Further reforms are therefore needed. The mere existence of the No-bail-out clause in the treaties is not sufficient to avert a new systemic crisis. Instead, a coherent and stable banking system for the whole euro Zone is needed. It is estimated that in the case of a future sovereign debt crisis 222 billion euro could be saved through an effective BU.

Three pillars of the Banking Union

While the single supervision (first pillar of BU) is broadly completed, the single resolution mechanism (second pillar) needs further strengthening and the design of the common deposit insurance (third pillar) is still open. The single resolution mechanism (SRM) is in place to restructure failing banks in the Eurozone and consists of the Single Resolution Board and a common resolution fund with its target level amounting to 55 billion euro. In addition, the Commission proposed to develop a common backstop facility to the Single Resolution Fund by 2024. This backstop for an enhanced financial capacity of the SRB would be used as a last resort option in case of systemic crisis when all private creditors were bailed in. Even though the idea of a common backstop is reasonable for the stability of the Eurozone, questions about control and liability remain unanswered. The issue of a credit line in the European Stability Mechanism (ESM) for the single resolution fund and a possible institutionalisation of the ESM also stay on the agenda.

Limited progress on a common deposit insurance scheme

The European Deposit Insurance (EDIS) will be the third pillar of the Banking Union and an essential step towards the completion of the EMU. It is an important instrument to prevent “bank runs” and thus to absorb shocks in the banking system. At the Euro-Summit in June 2018, the heads of state and government agreed on setting up a roadmap for the negotiations regarding EDIS. Progress is nevertheless limited. Mid-October 2018, the BDI and the Konrad-Adenauer-Foundation therefore organized a workshop on EDIS assembling the relevant actors from the institutional triangle, think tanks and federations. The European Central Bank (ECB) emphasized the necessity of EDIS for financial stability since national deposit insurance schemes are not resilient enough to potential crisis. EDIS as the next logical third step to a fully-fledged BU is indispensible for a strong EMU.

In the construction of EDIS, many critics would prefer risk reduction over risk sharing. The question whether risks in the bank sheets have been sufficiently reduced is still controversial. The ECB refers to big progresses in the banking sector and to Non-Performing-Loans (NPLs) considerably reduced throughout Europe. Hence, in the political discussion steps forward should be made in the political discussion. At the same time, there is a heterogenous situation in Europe. Especially Italy is making good progress, but the volume of NPLs is still high.

Due to a potential risk transfer, many Member States regard EDIS critically. In addition, the technical details of the national deposit insurance schemes are often highly complex. Many models are competing and could not yet be put together. The Economic and Monetary Affairs Committee in the Parliament and rapporteur Esther de Lange suggest a model that combines the national and European level. The undergoing negotiations imply other legislative initiatives, too: particularly the “banking package” for risk reduction in the framework of the revision of capital requirements for financial institutions.

A way forward

Completing the BU is important in spite of existing disparities on the concrete terms. At this stage, BU is highly appealing to banks beyond the euro zone. The decision to move the headquarters of Nordea from Sweden to Finland to be under the jurisdiction of BU reflects this. The window of opportunity for further deepening will not be open for a long time. For the real economy, a higher pace regarding the relevant files is necessary to ensure corporate financing during crises.