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More than a decade ago, plans to create a banking union were becoming reality[1]. The banking union was Europe’s response to the great financial crisis and Europe’s sovereign debt crisis. These events had shown that, in the absence of centralised supervision and crisis management frameworks, cross-border banking can lead to excessive risk taking, to risks spreading across countries, and to a vicious bank-sovereign nexus. The main objectives of the banking union were to break the nexus between bank and sovereign fragility, to restore private liability in banking, and to prevent excessive risk taking. But it was also hoped that banking union would foster healthy financial integration, bringing with it the benefits of integrated markets such as greater risk sharing and welfare-improving competition.
The design of the banking union envisaged common supervision, resolution and deposit insurance in the euro area. Ten years on from its launch, only two of its pillars, European supervision and resolution, are in place. Where do we stand? Have risks been reduced, has risk sharing been enhanced, and are banking markets more integrated?
In many ways, the banking union has been a clear success. The single European rulebook is in place, and common supervisory standards are directly applied by the ECB across Member States on the largest banks (“significant institutions"). The ability to benchmark more easily across banks is a significant advantage compared to purely national supervision.[2] And European oversight of smaller banks (“less significant institutions”) has been equally beneficial.[3]
We have seen a number of positive developments in terms of institutional integration and private risk sharing. With the Single Resolution Board and the Single Resolution Fund (SRF), institutions and safety nets have been put in place to deal with banks in distress, providing private, industry-funded resources to finance resolution.
Indicators of integration, which declined after the global financial crisis, have stabilised or started to trend upwards again. And this is despite the severe shocks that Europe was exposed to over the past few years.
But to take full account of the banking union to date, we need to paint a more nuanced picture. There are three main points I would like to discuss today....
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