22 November 2022

Bruegel: Completing Europe’s banking union: economic requirements and legal conditions

This contribution analyses the deficiencies of the current framework and identifies possible responses, in line with three levels of reform ambition. Authors: Beck, Krahnen, Martin, Maye, Pisani-Ferry, Tröge, Weder di Mauro,Véron , Zettelmeyer

Executive summary

The European Union’s banking union project started in mid-2012 in response to the euro-area crisis, with the goal of breaking the bank-sovereign vicious circle. The objective was also to restore private liability in banking and to move towards an integrated supranational market for banking services. For all the progress achieved in the past decade, particularly in banking supervision, these aims have not yet been accomplished. 

This Policy Contribution analyses the deficiencies of the current framework and identifies possible responses, in line with three levels of reform ambition. We label these ‘incremental’ (broadening the scope for private-sector burden-sharing in future cases of bank failures), ‘real’ (effectively breaking the bank-sovereign vicious circle), and ‘cosmic’ (a single, seamlessly integrated banking market). European policymakers should set their sights on the second level, which we view as achievable within the current decade, requiring new EU legislation but no change to the European treaties.

1 The banking union project

The great financial crisis and the euro-area crisis led to substantial reform of financial safety nets across Europe and – critically – to the introduction of supranational elements. Specifically, a supranational supervisor was established for the euro area, with competences and tasks depending on the systemic relevance of supervised credit institutions. A resolution mechanism was created to allow the frictionless resolution of large financial institutions. This resolution mechanism has been now complemented with a funding instrument.

For all the progress that has been achieved, the banking union remains unfinished, and has major deficiencies. The Eurogroup in June 2022 concluded a round of negotiations between EU countries by calling for further reform in the area of crisis management and resolution[1].

This Policy Contribution assesses the current and the desired state of the banking union project. The key underlying question is the level of ambition and how it matches with effective legal and regulatory tools. Two questions structure our evaluation:

• What would be a reasonable definition and rationale for a ‘complete’ banking union, and what legal reforms would be required to achieve it?
• Banking union is a case of a new remit for European Union-level policy that so far has been conducted on the basis of long-existing treaty stipulations, namely Article 127(6) of the Treaty on the Functioning of the European Union (for banking supervision) and Article 114 TFEU (for crisis management and deposit insurance). Could banking union be completed through secondary law, or is a more comprehensive overhaul of the legal architecture required to ensure legal certainty and legitimacy?....

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