A new CEPR Policy Insight asks why it got stuck and analyse what it would take to get it unstuck.
Although more progress has been achieved than most observers could have
imagined 12 years ago, the European Banking Union still has important
gaps and deficiencies. The authors argue
that policymakers should at a minimum aim for reform involving (i) a
‘super’ Single Resolution Board that both fully integrates national
resolution bodies and national deposit insurance schemes, possibly in a
two-tier design; and (ii) concentration limits for sovereign bond
holdings by banks, thereby discouraging government bailout of banks and
weakening the bank-state nexus.
In what sense is Banking Union stuck?
Banking Union is based on three major pieces of legislation: the
Single Supervisory Mechanism (SSM) Regulation (2013), the Bank Recovery
and Resolution Directive (BRRD) (2014), and the Single Resolution
Mechanism Regulation (SRMR) that established the Single Resolution Board
(SRB) in 2015. The institutions and policy changes were supposed to
make banking fragility less likely, permit national bailouts only in
exceptional circumstances, and ensure that failed banks could be
resolved without fiscal support and without creating a financial
disaster. In turn, this was expected to prevent contagion from banks to
sovereigns and from sovereigns to banks and facilitate the development
of a pan-European banking market and the formation of pan-European
banks, thus avoiding the concentration of country-specific risk on the
balance sheet of national banks. It was also meant to facilitate bank
exit in overbanked economies.
By and large, these aims have not been realised. There have been few
bank exits. The euro area banking system remains fragmented along
national borders, with very few cross-border mergers and very limited
cross-border competition. Banks remain disproportionately exposed to
their national sovereigns, and the solutions to banking problems stays
predominantly national. In most recorded cases of ailing or failing
banks, the SRB-led resolution option has been circumvented, and national
practices of dealing with banking crises have continued to diverge
significantly.
Proximate causes of the failure
There are four proximate causes. First, significant crisis management
competencies remain at the national level. Common supervision and
resolution primarily apply to the largest 100-plus banks in the euro
area, while national authorities remain responsible for most supervisory
tasks in relation to ‘less significant institutions’ (LSIs). Deposit
insurance remains national. So is the option to liquidate an ailing bank
under normal (national) insolvency procedures, which vary significantly
across member states, and allow generous injections of public funds.
Second, supranational decision-making remains fragmented. For
example, resolution decisions taken by the SRB may need the consent of
other authorities, including DG COMP, the Council, and, at the
implementation stage, the input from national resolution authorities
(NRAs). This effectively creates numerous veto players and renders
efficient decision making difficult, as special interests and their
political backers have many places to turn to in their lobbying efforts.
Third, supranational decision makers (the SRB and the European
Commission) have both the option and strong incentives to shy away from
implementing EU-level resolution. SRB can deny a public interest in
resolving a failing bank at the EU level if it determines that
resolution objectives can be achieved under normal insolvency
proceedings. One incentive to do so is the harsh creditor bail-in regime
envisaged by the BRRD, which creates incentives to avoid EU-level
resolution in order to allow national bailouts. Another is legal risk:
the ‘no creditor worse off’ (NCWO) principle, enshrined in SRMR and
BRRD, requires resolution authorities to pick resolution schemes and
actions that do not impose greater losses on bailed-in creditors than
these would have incurred in national insolvency proceedings.
Fourth, attempts to enact regulation that would limit the exposures
of banks to the domestic sovereign, such as concentration limits, have
not been successful....
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