Banking Union discussion in Brussels: testing willingness for further reforms


About ten days ago, 80 participants from the European Union community took part in a very interesting pre-launch event to discuss ECFR’s new policy brief, “How to complete Europe’s banking union” at the Centre for European Policy Studies (CEPS) in Brussels.

The brief describes the progress that the euro area is making through the EU banking union framework, which has now been agreed. Banking union, along with related legislation such as that setting out higher capital requirements for banks through the capital requirements directive IV (CRD IV), will make the euro area banking system much more stable. The union will also make supervision much more uniform and coherent. Moreover, it will limit the toxic link between member states’ banking systems and their sovereign debts. It will make a banking crisis less likely and restrict bail-outs by the member states by prescribing that private creditors have to be bailed in before public funds can be used for a bank rescue.

The most important of these is the fact that different countries could still adopt a differentiated treatment of banks in cases of crisis.

Even so, as the brief makes clear, some shortcomings remain in the construction of the banking union. The most important of these is the fact that different countries could still adopt a differentiated treatment of banks in cases of crisis. The Bank Recovery and Resolution Directive (BRRD) allows for deviation from the “no bail-out without bail-in” rules under certain conditions in times of systemic crisis. In these circumstances, member states may still inject public funds as “precautionary recapitalisation”. This creates a danger that member states with solid public finances will continue to bail out banks to protect “national champions”, while member states with precarious public finances will have to bail in creditors.

A related problem is that the structure of the banking union might not be able to deal with a systemic crisis, because the funds available for bail-outs will remain limited. Only €55 billion will be available after eight years, as compared to €500 billion committed by the German government as a bank rescue package in 2008. Moreover, there is still no fiscal backstop for the programme.

As a result, the brief warns that banking union will most likely not be able completely to recreate a level playing field in the euro area banking market. Banks in more fiscally solvent countries will maintain their advantage.

In the first session of the event at CEPS, Jürgen Schaaf from the European Central Bank (ECB), Shahin Vallée from the office of European Council President Herman van Rompuy, and Karel Lannoo from CEPS commented on the ECFR analysis.

"Banking union will significantly weaken the toxic link between national banking systems and sovereign debt, but it will not be able to sever the link completely."

Jürgen Schaaf spoke of the strong progress that the ECB has made in setting up the supervisory structure. He believes that the move to the Single Supervisory Mechanism (SSM) will have long-lasting and profound impacts on financial integration and openness across Europe. It will also work to change the nature of the external representation of the euro area, for example in bodies for setting international standards. He agreed with the brief’s analysis that banking union will significantly weaken the toxic link between national banking systems and sovereign debt, but that it will not be able to sever the link completely.

Shahin Vallée pointed out some more unresolved issues regarding the banking union. He said that banking union could lead to a fragmentation between member states and non-banking union EU countries such as the United Kingdom. He also speculated that in some instances, a conflict could arise between the ECB’s supervisory role and its role in setting monetary policy. For example, the ECB could find it hard to engage in asset purchases at the same time as carrying out an asset quality review of the banking sector, even if within the ECB, the two tasks were completely separated. Finally, he asked who had the ultimate political responsibility for shutting down a bank within the new structure, whereby European and national institutions are supposed to have joint responsibility for supervision and decision making.

Karel Lannoo suggested that the ECFR brief’s analysis on the potential for abuse of extraordinary public funding and on the lack of a fiscal backstop was perhaps too pessimistic. He pointed out that any extraordinary public financial support was subject to the EU Commission’s approval under state aid rules. And he noted that the European Stability Mechanism (ESM) can lend funds to member states for bank capitalisation.

In the second session of the event, the agenda for banking union for the coming years was discussed by the European Commission’s Director-General for Internal Market and Services Jonathan Faull, Levin Holle from the German Ministry of Finance, and Antonio García del Riego from Santander.

Jonathan Faull said that the current banking union structure was a huge step forward. Moreover, given legal and political constraints, the current set-up was all that could be achieved at the moment.

Antonio García del Riego said that in the coming years, common definitions would need to be found for key banking concepts, noting that a common definition for non-performing loans was only very recently adopted. He also predicted that banking union would lead to cross-border consolidation in the European banking market.

The panel agreed that banking union was a huge step forward for Europe, both in terms of integration and in terms of making Europe’s banking system more secure. Participants disagreed on the need for a quick and comprehensive introduction of a true fiscal backstop. This element deserves to be the subject of more work, which ECFR will continue after the summer break.

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