Economics of the European Union Carla Rivas Faro

The European Banking Union

What is the European Banking Union and when is it born?

The European Banking Union is born as a complement for the Economic

Monetary Union and the internal market after the financial crisis in 2008. Its main
objective is the improvement of supervision for the European Banks, forcing these
banks to follow the same set of rules to ensure that banks procure to take
measured risks and that if failing its consequent impact will be as little as possible
on the real economy and public financing of Eurozone countries (European
Parliament, 2021).
To pursue the objective of a safer sector for the financial market the Banking
Union demand stronger prudential requirements for banks, an improved
protection for depositors and rules for managing falling banks.
When financial crisis, the need of a new mechanism to control this kind of
situations became evident. The Banking Union provides a deeper integration of
both the euro and the European banking system. The European Banking Union
affects every eurozone country, and non-eurozone countries can participate if
they want to.
For the achievement of this project the European Commission created two
different mechanisms: a Single Supervisory Mechanism (SSM) and a Single
Resolution Mechanism (SRM) for banks. In addition, in November 2015 another
step was taking with the formation of a European Deposit insurance Scheme
(EIDS) to give the union a higher and more uniform insurance cover for all retail
depositors (European Commission, 2016). Following, the different procedures
are going to be explained.

The Single Rulebook

Focusing first on the Single Rulebook, its term was set in 2009 by the European
Council to refer to the purpose of a common regulatory framework for the
European financial sector that would complete the single markets in the field of
financial services. Its main objective is to provide a single set of harmonized and
prudential rules which different financial institutions throughout the EU must
respect.

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Economics of the European Union Carla Rivas Faro

Before Single Rulebook, European banking legislation was based on Directives

that left important divergences and interpretations in national rules creating legal
uncertainty enabling institutions to exploit regulatory loopholes, distorting
competition, and provoking burdensome for firms to operate across the Single
Market.
As it has been explained, the financial crisis gave evidence of the need of a
harmonized regulation setting a common definition of regulatory aggregates and
common procedures for the computation of key requirements: capital ratios or
liquidity standards.
Therefor the Single Rulebooks looks for a more resilient since it ensures that
prudential protection is applied across the EU and not limited to individual
member states as their economies are interconnected. More transparent
because it entails an easier comparability between financial institutions for
supervisors, deposit-holders, and investors. And more efficient because it
ensures that institutions are not obliged to comply with 27 different sets of rules
(European Banking Authority, 2021).

The Single Supervisory Mechanism

This first mechanism consists of the first pillar of the European Banking Union, it
provides the European Central Bank the role of core prudential supervisor of
Financial Institutions in both, eurozone countries and those non- eurozone
members of the European Union that choose to join.
The ECB is in charge of directly supervising the largest banks at the same time
national supervisors control the rest of banks. Closely together, both monitors
work to check that banks comply with the EU banking rules and tackle problems
early on.
The two regulations that settle the framework of this mechanism are the Council
Regulation (EU) No 1024/2013 that establishes the Single Supervisory
Mechanism as a system to supervise banks inside the Banking Union and the
Regulation (EU) No 1022/2013 which lines up the existing legislation on the
establishment of the European Banking Authority (EBA) to the changed
framework for banking supervision (European Commission, 2016).

Single Resolution Mechanism

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Economics of the European Union Carla Rivas Faro

The Single Resolution Mechanism responds for the orderly restructuring of a

bank by a resolution authority when the bank is failing or its possibilities to fail are
high. The main purpose of this methodology is to ensure that a bank bankrupt
does not harm the broader economy or, on the other hand, causes financial
instability, that is, minimized costs for taxpayers and to the real economy. The
SRM applies to all banks covered under the Single Supervisory Mechanism.
In the procedure when a bank fails even though stronger supervision, the SRM
permits bank resolution to be handed through a Single Resolution Board (SRB)
and a single resolution fund that is financed by the European banking sector.
Focusing on the SRB, it is a fully independent EU organ acting as the central
resolution authority within the Banking Union, it manages the single resolution
fund too (European Commission, 2021).

Single Deposit Insurance Scheme

Years after, in November 2015, the European Commission presented a new

proposal: to set up a European Deposit Insurance Scheme (EDIS) for bank
deposits in the euro area. It is the third pillar of the total of the European Banking
union and its recommendation was taken as a part of bigger package of measure
which had as purpose to deepen the economic and monetary union completing
the banking union.

The EDIS ensures that all deposits up to € 100,000 are safeguarded through
national DGS all over the EU and it is built on the system on national deposits
guarantee schemes (DGS) that is regulated under the Directive 2014/49/EU. As
the other mechanism, the EDIS provides a stronger a more uniform degree of
insurance in the eurozone, reducing the vulnerability of national DGS and
ensuring the depositor confidence. With EDIS, the level of trust a depositor does
not depend on the bank’s location and the link between banks and their national
authorities will be weakened.

The national DGS and EDIS intervene when any banking union bank with
deposits below €100,000 is placed into insolvency or resolution and it becomes

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necessary to pay out deposits or finance their transfers to another bank. The
scheme will develop in phases and the contributions of EDIS will progressively
increase over time. During the last stage of the EDIS creation, the safeguarding
of bank deposits will be completely financed by EDIS, with the support and
cooperation of national DGS (European Commission, 2016).

Conclusion

In my opinion, the European Banking Union supposed a great step taken in order
to achieve a higher stage of economic integration within the European Union. On
the other hand, I believe the measures and regulations taken approach to all the
different fields necessary to control for the purpose of avoid reaching to the
financial crisis of 2008.

Bibliography

European Banking Authority. (2021). The Single Rulebook.

https://www.eba.europa.eu/regulation-and-policy/single-rulebook Access: 17th of
December 2021.

European Commission. (2016). Single resolution mechanism. European

Commission. https://ec.europa.eu/info/business-economy-euro/banking-and-
finance/banking-union/single-resolution-mechanism_es#documents Access:
17th of December 2021.

European Commission. (2016). Banking Union. European Commission.

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-
union_es Access: 17th of December 2021.

European Commission. (2016). Single supervisory mechanism. European

Commission. https://ec.europa.eu/info/business-economy-euro/banking-and-
finance/banking-union/single-supervisory-mechanism_es Access: 17th of
December 2021.

European Commission. (2016). European deposit insurance scheme.

https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-
union/european-deposit-insurance-scheme_en Access: 17th of December 2021.

European Parliament. (2021). Banking Union. Banking Union | Fact Sheets on

the European Union | European Parliament.
https://www.europarl.europa.eu/factsheets/en/sheet/88/banking-union Access:
17th of December 2021.