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 ('bank-sovereign vicious circle'). 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. Conversely, weakness in sovereign credit resulted in deterioration of the balance sheet position of the banking sector, not least because of high domestic sovereign exposures of the banks. 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 ('bank-sovereign vicious circle'). 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. Conversely, weakness in sovereign credit resulted in deterioration of the balance sheet position of the banking sector, not least because of high domestic sovereign exposures of the banks. 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 SSM took up its authority on 4 November 2014, and the SRM entered into full force on 1 January 2016. As of October 2018, the geographical scope of the banking union was identical to that of the euro area. In future, other non-euro member states of the EU may join the banking union under a procedure known as close cooperation. Bulgaria is expected to join in the course 2019, as part of its longer-term aim to adopt the euro as its currency. 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. 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 17 April 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 25 April 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 23 May 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 signalled a degree of convergence on this agenda when declaring on 4 June 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 26 June 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 recapitalisation 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 28–29 June 2012. The summit's brief statement, published early on 29 June, 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 recapitalisation 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 recapitalisation 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 recapitalisation 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. Bruegel, a Brussels-based think tank, has been credited for popularising 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 popularised 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.