The BANKING UNION, what is it? | European Bank Resolution | Banking Supervision | Reforming global bank capital requirements |


  The BANKING UNION, what is it?
the new 185/165-metre-twin-skyscraper and a new low-rise building to connect the two buildings, expressing the separation between the key tasks and supervision

Banking Union, presentation European Commission

A banking union establishes a single financial market, where banks are separated from their sovereigns. Supervision on financial institutions is held at European level. Additional components are a single resolution mechanism and a European deposit insurance scheme that protects savings. The consequences are significant, for national supervisors lost the final responsibility for the health of their banks, the responsibility for banking supervision in the euro area was transferred to the ECB to prevent that small banks can cause problems. European banks deposit money into a fund that is used for problem banks that are no longer viable to settle. And a European deposit guarantee scheme should prevent the flight of capital from South to North (European banks must be equally safe).

The Banking Union was identified as the second cornerstone for EU policy-making of the new leadership. With publication of the results of its Comprehensive Assessment at the end of October 2014, the European Central Bank has set the standard for its new mandate as supervisor. But this was only the beginning. The heavy work started in early November, with the day-to-day supervision of the 120 most significant banks in the eurozone under the Single Supervisory Mechanism. The centralisation of the supervision in the eurozone will pose a number of challenges for the ECB in the coming months and years ahead.

"We were too concentrated on regulation and too little on supervision (hence the insistence of the ultimate goal being fostering the convergence of supervisory cultures in the EU). Moreover, and most relevant, the need for cooperation for the eurozone was greater than for non-eurozone countries. As is often the case in Europe, we needed a crisis to jump start what we foresaw a decade ago. But that is the dynamic of the EU, and probably of other federations as well. Unfortunately, it would be foolish to believe that everything has been sorted out. Once progress is achieved, new doubts, problems and conflicts inevitably arise: What is the role of the EBA in this new world? What will National Competent Authorities (NCA's) do de facto and not just de iure? How will the ECB interact with the newly established Single Resolution Board? How can we ensure that we preserve a single supervisor and, at the same time, keep the diverse typology of banks´ business models we currently have in Europe?"

Brussels Think Tank Dialogue 2014, read the policy paper

Brussels Think Tank Dialogue 2014 highlighted three key steps for the further development of the Banking Union:
  1. the European Central Bank (ECB) needs to shed light on some of the elements of the balance-sheet assessment exercise. The exercise will be fundamental in establishing the credibility of the ECB as supervisor and to dispel the doubts about the quality of bank balance sheets, which is essential to improve credit and access to finance, as well as the functioning of the internal market;

  2. the Single Resolution Mechanism deal reached by the finance ministers of the EU failed to break the link between banks and sovereigns. Further discussions should clarify the involvement of creditors in the burden-sharing of failed banks and how to distribute remaining recapitalisation costs between national taxpayers and taxpayers of other EU countries

  3. thinking of the European Stability Mechanism as one of the possible backstops for the Economic and Monetary Union, a Treaty change is necessary to include the Single Resolution Fund as a beneficiary of the European Stability Mechanism’s financing.

December 19, 2013, the European Union has taken a significant step towards establishing the banking union. EU leaders meeting in Brussels have given their backing to a common set of rules for managing the closure of failing eurozone banks:

  1. the first pillar of banking union is the ECB's new supervisory body to monitor all 6,000 banks in the eurozone (SSM as the first pillar of Banking Union). Germany and some other countries want to retain their own high degree of supervision over smaller banks, which are reckoned to pose less systemic risk.

  2. The second part is the Single Resolution Mechanism, to bail out or shut down problem banks in the eurozone.

  3. The final pillar is a common deposit guarantee, setting an EU-wide deposit guarantee of 100,000 euros (£84,000; $138,000) maximum per saver and there will be a common rulebook covering bank accounts across the EU.


European Bank Resolution  
'EUROPEAN BANK RESOLUTION: MAKING IT WORK!' (report The Centre for European Policy Studies published January 2016)

The greatest novelty in the response to the financial crisis are specific financial resolution frameworks. Banks need to have detailed resolution plans readily available, and authorities have to fullest powers to apply early intervention policies in case minimum capital requirements are not met, with the possibility to wipe out shareholders and bail-in debtors. For banking union, this became a new authority with the Single Resolution Mechanism (SRM).

The operational consequences of the new regime are enormous. Not only do the EU member states need to create resolution authorities – or a Single Resolution Mechanism (SRM), which need to require banks to draft resolution plans and have a minimum level of bail-in-able debt, they also need be in a position to apply the new rules, most often over a weekend. But with the diversity in bank business models, in bank financing structures and instruments at EU and global level, this will be a formidable challenge, above all for internationally active banks. Authorities will need to ensure that the process will work in a harmonious and well-coordinated way across a multitude of jurisdictions.

Following the financial crisis of 2007-08, global leaders (G20, 2009) launched a sweeping reform of banking regulation and supervision designed to reduce:
i) the probability that banks would fail,
ii) systemic risk and
iii) the impact that the failure of a bank could have on taxpayers, financial markets and the economy at large.

To achieve this third objective, policy-makers embarked on a policy agenda to end “too big to fail” conundrum and improve the ability to resolve global systemically important financial institutions (G-SIFIs). The aim was to create a regime in which financial institutions, especially global systemically important banks (G-SIBs), could ‘fail’ without significant adverse effects on financial markets or the economy at large and without cost to the taxpayer.

Now that this regime is largely in place, attention must turn to implementation. This report outlines, principally with respect to the EU, key steps that authorities, banks and financial market infrastructures (FMIs) should take to make resolution effective. Particular emphasis is placed on how the bail-in tool should be employed, as this tool is most likely to feature prominently in the resolution plans for significant banking institutions in the EU.


CEPS conducted the report 'ECB BANKING SUPERVISION AND BEYOND' to attempt to inform the debate and to offer both answers and solutions. The last five years have witnessed a huge redesign in the regulation of financial markets in Europe, culminating in the transfer of supervision of the largest banks in the eurozone to the European Central Bank (ECB). The regulatory agenda was largely set at the international level in the context of the G-20, while the supervisory change was a specifically European response to shortcomings at the national level. This raises the question: What next?
The start of the ECB as supervisor will coincide with the coming into office of a new European Commission, and before that a new European Parliament. As the EU and the world move out of crisis mode, it is likely that the Commission will be asked by the Parliament to set a more long-term agenda for Europe’s financial markets. With the agreement on bank resolution and recovery Directive (BRRD), and the compromises on the single resolution mechanism (SRM) and the deposit guarantee scheme (DGS), full banking union comes in sight. Not every element will apply immediately, however, and long transition periods apply, raising issues for the interim period. In addition, there will be a lack of clarity concerning who is in charge, the ECB or the member states, which will create confusion and stir up turf battles for some time to come.
Guide to
fit and proper



Reforming global bank capital requirements  

Reforming global bank capital requirements: What does it mean for Europe?

The global standards for bank capital requirements will once again be revised. The package that forms the completion of Basel III, but are sometimes also labelled Basel IV, were discussed during the High-Level Seminar co-organised by CEPS and IRCCF HEC Montreal in the European Parliament. This timely seminar, which gathered together policy-makers, supervisors, bankers, researchers and other experts, took place just days after the European Commission launched a banking reform package and on the eve of the meeting of the Basel Committee on Banking Supervision in Santiago (Chile) to agree on the revisions of the global standards. Some of the revisions, namely those concerning market risk requirements and the treatment of securitisation, were already expected. The Basel III accord, agreed in the midst of the global financial crisis in 2010, contained certain quick-fixes that were less sophisticated than the remainder of the standard.

These anticipated revisions are complimented by measures that try to address the large divergence in internal models that banks may use to calibrate the capital requirements. On the one hand, supervisors want to make the simpler standardised approach a more credible alternative to the internal models based approach, on the other hand it tries to reduce the differences between the models with a more restrictive capital floor. The revisions could have considerable consequences for banks’ capital requirements. They are therefore sometimes referred to as ‘Basel IV’.

The High-Level Seminar discussed the recent proposals and outstanding reforms of the Basel Committee, and considered the following questions: Do the proposals address the right issues and do they go far enough, or even too far?; How will they impact Europe’s banks, economy, and society?; How will they be transposed in the EU, and if so, will the Basel standards be applied to all banks, or only to the globally significant banks for which they have been designed?

All the participants underlined the need for revisions, although there were divergent views expressed on how the capital requirements should be revised. The revisions currently debated include measures to change both the standardised and internal ratingsbased approach for credit and operational risks as well as surcharges on the leverage ratio of global systemically important banks.

Looking at the motives behind the revisions, the supervisors want to make the simpler standardised approach a more credible alternative to the internal models-based approach and reduce the differences between the models with a more restrictive capital floor. Bankers fear that in particular the capital floors will lead to higher-than-necessary capital requirements, which will restrict banks in lending to the real economy. In their view, the revisions should take into account national specificities. For example, they argue, pointing to research of the supervisors, that their own models can better determine the risk weights for exposures, for which they have collected vast amounts of historical data on the default probabilities and losses (e.g. Danish and Dutch residential mortgages).

Researchers from IRCCF, CEPS and OECD emphasised the need for more stringent backup requirement in the form of a higher leverage ratio. They showed empirically that the enhanced use of internal models has eroded the average capital requirements. In particular, the average risk weights of banks with more market-oriented activities such as derivative exposures had decreased in the aftermath of the crisis. The researchers argued that a more explicit adjustment for business models in the capital requirements should be considered. Moreover, the leverage ratio has in general been a better predictor of bank distress, with banks showing leverage ratios above 5% being unlikely to fail. The average leverage ratio of European banks is already above this level, but many primarily larger banks would have to increase their capital to reach this level.

The regulators argue that European banks have sufficiently improved their capital in recent years, with higher and better quality capital. The revisions should therefore not lead to significant increases in the capital requirements, but only change the distribution across banks.


On the fifth anniversary of the start of the financial crisis, the commentary 'Banking Union in sight five years on' shows the regulatory steps that have been taken to date, and argues that the EU should apply the same logic of reinforced integration at the federal level that informed the Single Supervisory Mechanism to the bank resolution systems and deposit guarantee schemes. The comment ends with the conclusion that in hindsight, we can see that the financial crisis precipitated a huge step forward in European regulatory harmonisation and supervisory integration, but markets still need to follow. The cost of keeping the banking sector afloat during the crisis will continue to be a burden to taxpayers for years to come, but also a hindrance to efforts to restore real market discipline in the banking sector.
Banking Union: Stepping Stone or catalyst? Vitor Constancio: “We need a European-level entity and fund that can deal with major cross-border bank emergency. If the solution would be just coordination of national resolution authorities and a network of national authorities, than it cannot really address the cross-border question".
28 February 2013, during the CEPS Annual Conference on 'The Three Unions: From banking to economic to political?' Vitor Constâncio (former vp. of the ECB), Sharon Bowles (MEP and Chair of the Economic and Monetary Affairs Committee), Charles Goodhart (Director, Financial Regulation Research Programme) and Koos Timmermans (vice-chairman, management board banking ING group questioned or the banking union is a stepping stone or a catalyst (for EBA)

Banking Union: Stepping Stone or catalyst?

Very good progress is made on the ECB file regarding seperation between monetary policy and banking supervision. The banking union needs to have at least a supervisory body and addressing coordination of national policies is enough. The ECB's new role should extend to all banks and recapitalization should be reached by European funds. Balance sheets are to be studied first, before supervision is conducted, but the question of what to do with imbalances between balances european wide and on national level is thus not yet answered
December 13, 2012, the European Union has taken a significant step towards establishing the banking union, in terms of the EU level supervision of European banks. EU Finance Ministers agreed on a series of measures that will see the European Central Bank take over the supervision of a whole host of European banks. Negotations were long and compromises were made from all sides but according to reports the following was agreed:
  • the ECB will have direct responsibility for banks with assets of more than EUR 30bn, or representing more than 20% of a Member States’ GDP, which means between 150 and 200 banks across Europe could come under the ECB’s supervision;

  • national supervisors will remain responsible for the day-to-day supervision of smaller banks, like German saving banks, as well as consumer protection, money laundering and payment services. But the ECB will have the ability to intervene in smaller banks when they appear to represent a risk, giving instructions to national supervisors. A mediation panel will be created to resolve disputes with national supervisors;

  • to protect the interests of non-eurozone countries, a whole host of provisions were put in place to cater for the fact that EU member states that are not part of the single currency do not hold voting rights in the ECB. A supervisory board will be set up within the ECB to function as a Chinese wall between the bank's monetary policy role and its new bank supervision responsibilities. Non-eurozone countries that sign up to the banking union will have equal voting rights on the supervisory board. The board's draft decisions would be considered adopted unless rejected by the ECB governing council;

  • also a “double majority” principle will be inserted in the European Banking Authority’s decision-making mechanism. According to the agreement, EBA decisions must receive the approval of a majority of members outside the banking union as well as a majority of states inside the banking union;

  • regarding voting arrangements for setting regulations within the banking union, a simple majority and a weighted majority would be required for any decision, allowing the one country - one vote rule to be maintained but at the same time recognising the extra clout to bigger countries;

  • there is no fixed deadline for the ECB to assume its new supervisory role of Europe’s biggest banks. But there are a series of specified goals that should be met during 2013, which, if met, could reduce the transition period to as little as a year;

  • the European Stability Mechanism, the eurozone’s EUR 500bn banks rescue fund without interference from governments or regulators), will not be able to inject money directly into banks before the new supervisory structures are in place, which is expected to be early 2014;

  • the agreement did not include the establishment of a common deposit guarantee scheme and a resolution mechanism for failing banks (include the debt write-down tool 'bail-in'). Efforts to reach agreement on these two aspects of the banking union will take place during 2013;

  • the compromise text will be rubber-stamped by the European Council before it is passed to the European Parliament for approval. Once inter-institutional agreement is reached, national parliaments will also have to give their assent.


Centre for Economic Policy Research (CEPR)
A roadmap to a banking union as a policy brief on A Federal Model for the EU was prepared by CEPS. 30 November 2012, CEPS published also 'The Contents and Timing of a European Banking Union: Reflections on the differing views', which again highlights the need for three basic and vital elements: European bank supervision, a European deposit guarantee scheme (DGS) and a European bank resolution mechanism.

In September 2012, CEPS also concluded that the banking union project has triggered highly polarising debates across the EU, tearing the union apart into many disparate and unexpected camps. This result is indicative of the enormous complexity of EU governance. Whereas the debates in the first half of September were fairly sanguine about the project’s prospects, the assessments have become grimmer in the second half of the month. Navigating the dossier through the convoluted and multi-levelled route to approval before the end of the year will require strong leadership and imagination. With all that this may entail, a successful completion is not guaranteed.

To appreciate the magnitude of the challenge, consider the following sets of curious and unpredictable dilemmas that the project’s advocates must resolve before it can hope to see the light of day:
  • Article 127.6 of the Treaty on the Functioning of the EU, which allows leaders to confer “specific” supervisory tasks on the European Central Bank, requires unanimity of the Ecofin Council, but only advice from the European Parliament. However, since the European Commission also proposed to amend the voting rules contained in the Regulation establishing the European Banking Authority, which came into being in 2011, the Parliament now insists on co-decision for the entire dossier.

  • Three member states, and not the most expected ones at that – Sweden, Poland and Hungary – have already voiced substantial reservations on banking union, primarily on the grounds that they would not be part of the decision-making structure when opting into ECB supervision.

  • German Sparkassen and other smaller banks – which constitute Germany’s biggest sub-sector in the banking industry and account for 45% of the country’s deposits – do not want to be part of the banking union, and even less of an eventual eurozone-wide deposit guarantee scheme.

  • The UK, on the other hand, continues to be strongly supportive of the project, but has expressed reservations about the single rulebook for banks, which is an intrinsic part of the proposed bank union.

There is a real risk that the incapacity to solve these dilemmas in a coherent way will undermine the momentum the project has managed to generate so far. Important concessions to groups or member states on core elements of the project would seriously dilute its effect and bring us back to the situation that the eurozone wanted to overcome in the first place, namely huge information asymmetries between EU bank supervisors and central banks. Such concessions would also endanger the conditionality of the aid being extended to Spain.
Banking union is thus a key test case of the EU’s capacity to resolve its internal divergences and to show the world at large that it is moving forward‘to an ever-closer union’.
By supporting banks not by the government can prevent larger debt and that they will become deeper involved into trouble when they save their banks. If so, this leads to higher interest rates on the bond-market. Such a downward spiral is one of the reasons why the euro crisis continues.


Several recent commentaries and reports were drafted in the mean time. The Centre for European Policy Studies let us know in the commentary 'Banking Union in the Eurozone and the European Union' that there is a need, to start with, to distinguish clearly what is needed to address a‘systemic’ confidence crisis hitting the banking system – which is mainly or solely a eurozone problem – and ‘fair weather’ arrangements to prevent individual bank crises and, when they occur, to manage them in an orderly fashion so as to minimise systemic spillovers and the cost to taxpayers, which is of concern for the entire European Union. Much of the ongoing debate on deposit insurance and banking resolution funds mainly refers to the latter issue.

In the recent drafted report 'Completing the Euro', in the chapter on 'Banking and the financial sector' a euro area banking union is pledged. Financial market stability has been neglected by the architecture of the Maastricht Treaty. Despite an increasingly integrated EU financial market, with the volume of cross-border banking growing substantially in the 2000s, financial supervision remained a prerogative of Member States, with only a modest degree of supranational coordination. This dichotomy prevented, prior to the crisis, both the detection of the development, in some EU countries, of excessive private sector imbalances and the identification of cross-country and cross-sector interlinkages, which therefore went unaddressed. In addition to these banking supervision deficiencies, the EU faced the financial crisis with no banking crisis management capacity.

The lack of a European framework for banking supervision and crisis resolution is, at least partly due to the fact that, until the crisis, the interdependency between national banking systems in the EMU was underestimated. The crisis has highlighted the fact that, given the increased financial integration spurred by the common currency, the financial instability faced by one Member State is a threat for the EMU as a whole. Furthermore, the crisis exposed a fragility of the euro area, which is the interconnection between the banking crisis and the sovereign crisis that weaken both sovereigns and banks and the whole monetary union as a consequence.

As the failure of financial markets is at the heart of the crisis, a comprehensive framework for financial stability is a crucial piece in the EMU (Economic Monetary Union) puzzle. This implies moving towards a banking union addressing the financial system deficiencies revealed by the crisis

Although it would seem straightforward to establish a banking union for the EU as a whole because of the character of the single financial market as an EU-27 feature, we consider that the euro area should not wait for an agreement in the EU-27 framework and not make any concession in order to move to an EU-27 framework if that entailed a less functional solution for the euro area.

We therefore call upon the euro area to take the lead in the setting up of a true banking union. We are aware that it could be a delicate issue to achieve the right rules for financial stability in the euro area without endangering the functioning of the single financial market. But it must be possible to ensure that the banking union within the euro area do not entail distortions to competition between the EU-27 within the single market for financial services and the euro area.

The recent reforms in EU financial market supervision are not sufficient. Following the crisis, the EU supervisory framework already underwent a comprehensive reform, aimed at ensuring a stable, reliable and robust single market for financial services. The new architecture consists of two mutually reinforcing European pillars. On the one hand, a micro-prudential pillar, with the establishment of three European Supervisory Authorities (ESAs) for banking (EBA), securities (ESMA) and insurance and pension funds (EIOPA). The specific powers granted to the three ESAs have been designed to improve the quality and consistency of supervision, reinforce the supervision of cross-border groups, strengthen crisis prevention and management across the EU, and establish a set of common standards applicable to all financial institutions. On the other hand, a macro-prudential pillar, with the creation of the European Systemic Risk Board (ESRB) with a mandate to prevent and mitigate the build-up of risks to financial stability in the EU financial system and to contribute to the smooth functioning of the internal market.

This new framework for financial supervision is a step in the right direction. However, the design as a coordination framework means that national authorities will ultimately retain competence for most decisions. Indeed, the new supervisory agencies have limited powers and resources. The EBA does not have the power and capacity to conduct deep and far-reaching bank stress tests. It still has to rely on information provided by national supervisors, who ultimately have the authority to intervene.

The EBA is thus not yet a true European supervisor, and even less a euro area supervisor. The limited supervisory role of the EBA is, of course, related to the absence of financial means at EU level to support banks in difficulty. Taxpayers’ resources remain firmly in the hands of national governments and parliaments, and logically therefore Member States have the main responsibility for banking supervision.

Concerning the ESRB, it has the task of monitoring the soundness of the whole financial system in the EU; but with more than 60 participating institutions it is unlikely to become a very effective institution. In addition, it has only access to aggregate data. If the ESRB wants to obtain information on individual banks, it has to ask the national supervisors in a complicated process. And even if it identifies risks, the ESRB can only issue warnings and recommendations which are not binding for the country to which they are addressed. Furthermore, the resolution of a cross-border financial institution under the new framework will still be a highly complex task, as several national authorities, national deposit insurance funds and national resolution funds will be involved. The reform undertaken is then insufficient to remedy the problems of financial supervision and crisis resolution in the EMU.

We need to move towards a more European solution for both banking supervision and crisis resolution at the EMU level. In designing the EMU banking union, it is vitally important that future arrangements for supervision and crisis resolution of cross-border banks are dealt with jointly as a package and not in isolation, as the solutions in these two areas are totally intertwined. We cannot separate the supervision from the resolution in the sense that supervision is the preventive arm and even if we prevent crises they will still occur and then we will need the corrective arm.


The euro area banking union should in the first place include a fully integrated banking supervision for the euro area. This would include having a euro area supervisory institution being responsible for micro prudential supervision with investigation powers. Creating an integrated euro area banking supervisory authority instead of 17 autonomous national supervisors would have obvious advantages compared with the status quo. With integrated supervision, all relevant microeconomic data for euro area banks would be made available to a single institution. This would allow the supervisor to identify all financial links between the Member States, as well as concentrations of lending to specific borrowers, sectors and regions. A euro area institution would be much more independent of national interest groups and politicians than a national supervisor. Thus, the problem of “regulatory capture” could be avoided or at least dramatically reduced.

This euro area banking supervisory institution should either be built up within the ECB or closely cooperate with the ECB.

Conferring specific tasks upon the ECB concerning policies relating to the prudential supervision of credit institutions and other financial institutions, but not insurances could even be done without changing the Treaty. Article 127.6 TFEU allows the Council after consulting the European Parliament and the European Central Bank, to unanimously make that choice.

Overall, the group considers that supervision of banks should, as a general rule, be consistent with the EU internal market rules and seek to avoid regulatory arbitrage between different levels. A pan-EU supervisory authority in a position of hierarchical superiority vis-à-vis national layers of supervision would be the most desirable approach. The exact design would have to be determined politically, in particular with regard to the relationship of euro area countries to the EU-27 28


In parallel to an enhanced supervision structure, there should also be the setting up of a crisis resolution framework at the euro area level. The euro area should aim at creating a framework inspired by the Federal Deposit Insurance Corporation in the US (FDIC), combining the function of a banking resolution agency and a deposit guarantee scheme. A European FDIC-style agency would have to become involved at an early stage in the resolution of a cross-border banking crisis, assuming a role in negotiating the resolution path, alongside the relevant national authorities. This could include the adoption of ex-ante burden sharing arrangements. This agency could also supply funds needed to facilitate the resolution of a cross-border banking group, provided this was less costly than paying out deposits in liquidation. The euro area-wide bank deposit guarantee scheme, which would serve as a “pay-out box” in case of deposit losses, would be easier to implement and less controversial, as public guarantees on bank deposit across the EU are partially harmonized and less discretionary.

The costs of a European FDIC-style agency could be based on an insurance fee raised from the banks, but would clearly have to be complemented with pay-ins from national budgets. As a system of euro area-wide guarantees as a backstop would be necessary for both households and non financial corporates deposits, the amounts involved would possibly be very large. The intervention capacity would therefore have to be financed and backed up by all euro area governments. In order to reduce the moral hazard associated with the potential use of public money, deposit authority should be assigned some “prompt corrective action mandate” (as the FDIC in the US). One option to discuss could be to provide the European deposit/resolution authority with the power to monitor the “recovery and resolution” plans submitted by banks to their primary supervisor. Moreover, there should be clear rules for the resolution authority to impose losses to creditors (bail-in instruments).