21 February 2024

ECON study - Angeloni:The Next Goal: euro area banking integration -- A single jurisdiction for cross-border banks

In its first ten years (2014-2023), the banking union was successful in its prudential agenda but failed spectacularly in its underlying objective: establishing a single banking market in the euro area. This goal is more important than ever, and easier to attain than at any time in the last decade.

EXECUTIVE SUMMARY
Ten years after its inception, the banking union remains incomplete; but not to the same extent in all respects. The single supervision at the ECB has broadly accomplished its immediate mission, defined in 2014 by its foundational chair, Danièle Nouy, as “… to help rebuild confidence in the balance sheet of SSM area banks”. Its responsibility now is to preserve and hone the progress achieved. The framework to deal with bank crises has not worked as expected; recognizing this fact, the European Commission has proposed in April 2023 a package of legislative amendments which are now being examined by the EU co-legislators.

What remains spectacularly underachieved and not properly addressed is the underlying objective of creating a true banking union: a single market for banking products and services commensurate to the economic and political dimension of Europe and to the global role she aspires to play.

The first part of this paper illustrates this fact and makes three points:
1. The lack of a single banking market is costly, always and especially today when Europe faces the historical challenge of enacting four economic and societal transformations: Green, Digital, Geo-Strategic and Structural.
2. Making progress towards an integrated banking union is easier now than it has ever been in the last decade; hence the time to act is now.
3. Cross-border banking pertains to a small group of banks, having the structure, the culture and the ambition to do so. Regulation should recognize this fact and design cross-border banking norms that fit those subjects specifically, within the general set of rules applying to banks in general.
The second part of the paper examines the legal obstacles to a genuine integrated banking union and sketches a set of legislative amendments that would remove those obstacles.

The overarching goal is to create a single jurisdiction for cross-border banks in the area covered by the banking union, “country blind” from the regulatory, supervisory and crisis management viewpoints.

The main elements of the proposal can be summarized as follows:
• Define a set of structural and prudential criteria that need to be satisfied by the euro area banking groups that conduct, or realistically aspire to conduct, substantial cross-border business;
• Repeal or waive the legal provisions that prohibit the free movement of capital, liquidity and other prudential resources within the banking groups belonging to this category;
• In parallel, strengthen the provisions that govern the internal support within those groups, making them mandatory and enforceable and prescribing that they should be activated, in case of distress, both before and after the entity reaches the point of non-viability;
• Establish that these groups and/or the entities thereof, if declared failing-or-likely-to-fail by the supervisor, would be resolved by the European resolution authority, not liquidated nationally;
• Prescribe that the deposit insurance function for these groups would be performed by a dedicated scheme, contributed by the groups themselves, whereas the existing deposit insurance schemes would retain their functions with regard to banks having a predominantly national business focus.

 

ECON'S IPOL paper

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