We ended 2020 with agreement on another important step on the road to the Banking Union.

The Eurogroup (in inclusive format) agreed to move forward with the reform of the European Stability Mechanism and to establish the common backstop to the Single Resolution Fund – which will enter into force at the beginning of next year – 2022 – earlier than expected.

Establishing the common backstop increases the resources available to the Single Resolution Fund, providing a measure of last resort, and ensuring that the Single Resolution Mechanism will be able to act more credibly and efficiently in the future. It further shields the economy and society from the impact of potential bank failures.

The start of the New Year gives us a chance to reflect on what’s next for the Banking Union. We cannot stop here.

Completing the Banking Union is essential for the future of the Economic and Monetary Union. The 2008 global financial crisis demonstrated the interdependence of the Euro area countries and their banking sectors – and the negative impact of fragmented banking sectors with excessive links between national banks and national governments.

The development of the Banking Union architecture as well as the single rulebook have been ongoing since the last crisis. The positive impact of these developments have been evident during the COVID-19 crisis, with the banking sector weathering the storm thus far, allowing it to play its role in ongoing recovery efforts.

An incomplete Banking Union puts this progress at risk.

We are still missing key elements: the ‘third pillar’ of the Banking Union, namely a European deposit insurance scheme (EDIS), as well as a credible solution for liquidity in resolution. These are essential to protect depositors across the whole of the Banking Union and safeguard financial stability. Without this third pillar, we have single supervision and single resolution, but fragmented national deposit guarantee schemes – undermining the whole project.

We currently have four work-streams on completing the Banking Union:

1. Crisis management
2. EDIS
3. Enhanced cross-border integration
4. The regulatory treatment of sovereign exposures and financial stability.

These are not new issues, but they are sensitive. We are pushing for progress and ambition in all four work streams. We should move faster where the consensus for reform is greater.

There is more consensus, for example, on revising the bank crisis management framework. The resolution framework can be a very effective tool but there’s scope to improve its functioning, in particular making sure solutions are available and functional for all banks, regardless of their size or business model.

The Commission will assess all options on the table. We want a system that is predictable and consistently applied. We need to ensure credibility, proportionality and a level playing field.

Some of the options on the table are to create additional crisis management tools for certain banks, such as setting up more centralised administrative liquidation tools or through substantial harmonisation of insolvency laws of Member States. Duplications of existing tools in the resolution framework should be avoided. We should also assess whether the current funding architecture is fit for purpose and the role for deposit guarantee schemes in a broad range of possible interventions. In doing so, we should avoid ‘re-nationalisation’ of the cost of dealing with of failing banks that may add to further market fragmentation and the bank-sovereign feedback loop.

The Commission will shortly launch a public consultation on the planned revision of the bank crisis management and deposit insurance framework, with a public conference in spring 2021. The feedback we receive will feed into the Commission’s proposal, due to be published by the end of 2021.

Also challenging is the debate on EDIS. EDIS remains important to reinforce the confidence and protection of depositors. Depositors deserve the same protection, regardless of where they are in the EU. But resolving the debate on the design of EDIS remains difficult.

Over the years, the debate has evolved towards a so-called 'hybrid’ model as a basis for negotiation. This hybrid model would be based on the co-existence of national deposit guarantee schemes with a common central fund. Initially, EDIS would provide liquidity or loans to national deposit guarantee schemes in need, already bringing tangible benefits for financial stability and the resilience of national banking sectors. The hybrid model can be designed so that it would evolve over time. Nevertheless, the Commission remains convinced of the need for a more ambitious EDIS set-up involving loss mutualisation in the steady state of the Banking Union.

Progress on common deposit insurance should unlock some of the difficulties around home-host issues and ring-fencing practices. Trust will need to be restored and incentives aligned, in terms of liability and control, to create a new home-host paradigm in the Banking Union. This should be the case both in a going concern and in a gone concern perspective. The challenge is how to reconcile financial stability with financial integration, in particular during the COVID crisis. I am aware of the sensitivities on this topic, but we need to find a way forward. I stand ready to work constructively with all sides to make progress towards greater market integration.

We should also continue our work on mitigating the sovereign-bank nexus, in particular reflecting upon banks’ exposures to sovereigns and their financial stability implications. Similarly, discussions should start in earnest on a credible mechanism that meets international standards to provide liquidity in resolution.

At the Euro Summit, EU leaders agreed the next step, by inviting the Eurogroup in inclusive format to prepare, on a consensual basis, a stepwise and time-bound work plan on all the remaining elements needed to complete the Banking Union.

From the Commission’s side, we remain committed to working towards unblocking difficulties and making progress so that we can move forward with the completion of the Banking Union for the benefit of EU citizens and the single market. To be successful this time around, all parties involved will need to step up their efforts.