10 July 2013

A comprehensive EU response to the financial crisis - A strong financial framework for Europe and a Banking Union for the eurozone

1. A ROBUST FINANCIAL FRAMEWORK FOR THE SINGLE MARKET (see full press release link below)

2. THE BANKING UNION

2.1 Why a banking union for the euro area?

Uncoordinated national responses to the failure of banks have reinforced the link between banks and sovereigns and led to a worrying fragmentation of the Single Market in lending and funding. This fragmentation is particularly damaging within the euro area, where monetary policy transmission is impaired and the ring-fencing of funding impedes efficient lending to the real economy and thus growth.

Swift progress towards a Banking Union, comprising single centralised mechanisms for the supervision and restructuring of banks, is indispensable to ensure financial stability and growth in the euro area.

Building on the strong regulatory framework common to the 28 members of the Single Market (single rulebook), the European Commission has therefore taken an inclusive approach and proposed a roadmap for the Banking Union with different steps, potentially open to all Member States but in any case for the 18 Member States currently within the euro area.

2.2 The agreement on a single supervisory mechanism

On 12 September 2012, the Commission proposed a single banking supervision mechanism in the euro area (see IP/12/953). It is expected to be fully operational in late 2014.

Main features of the Single Supervisory Mechanism (SSM):

• It confers new supervision powers on the ECB for the banks of the euro area: the coherent and consistent application of the single rulebook in the euro area, the direct supervision of banks having assets of more than €30 billion or constituting at least 20 per cent of their home country's GDP, the monitoring of the supervision exerted by national supervisors on less significant banks. That said, the ECB may at any moment decide to directly supervise one or more of these credit institutions to ensure consistent application of high supervisory standards.
• The SSM is open to all non-euro area Member States.
• For cross-border banks active both within and outside Member States participating in the SSM, existing home/host supervisor coordination procedures will continue to exist as they do today.
• Finally the EBA will remain a key player of the single market, ensuring consistency in the application of a single rulebook to all banks within the EU by the single supervisory mechanism and all national supervisors outside of the SSM.

2.3 Towards a fully-fledged banking union

The reinforced regulatory and supervisory framework of the SSM and enhanced prudential requirements will bolster the safety of banks. However, the risk of a bank experiencing a severe liquidity or solvency problem can never be totally excluded. In the Banking Union bank supervision and resolution need to be exercised by the same level of authority and be backed by adequate funding arrangements. Otherwise tensions between the supervisor (ECB) and national resolution authorities may emerge over how to deal with ailing banks, while market expectations about Member States’ ability to deal with bank failure nationally could continue, reinforcing feedback loops between sovereigns and banks and fragmentation and competitive distortions across the Single Market. Swift and decisive action at the central level, backed by EU-level funding arrangements, are also needed to avoid nationally conducted bank resolution from having disproportionate impacts on the real economy, and in order to curb uncertainty and prevent bank runs and contagion to other parts of the euro area.

2.3.1 Single Resolution Mechanism

That is why the European Commission has proposed a single resolution mechanism to complement the SSM (see IP/13/674 and MEMO/13/675). It will basically apply the substantive rules of the draft Bank Recovery and Resolution Directive (see 1.2.3 above) in a coherent and centralised way ensuring consistent decisions for the resolution of banks, and common resolution financing arrangements.

The Single Resolution Mechanism (SRM) will ensure that – not withstanding stronger supervision - if a bank subject to the Single Supervisory Mechanism faces serious difficulties, its resolution can be managed efficiently. In case of cross-border failures, it would be more efficient than a network of national resolution authorities and avoid risks of contagion.

The SRM will take over when ECB, as the supervisor, would flag a bank, which needs to be resolved in the euro area or established in a Member State participating in the Banking Union.

In terms of timing, the SRM should be agreed by co-legislators before the end of the mandate of the current Parliament in Spring 2014.

As the SRM is corollary to the SSM, Member States outside the eurozone and joining the SSM will also join the SRM.

2.3.2 Will the banking union include a supranational Deposit Guarantee Scheme?

It is not envisaged to equip the banking union with a single supranational DGS at this stage. The priority is to reach an agreement on a common network of national deposit guarantee schemes. The proposal on DGS once agreed will ensure that every Member State has a deposit guarantee fund which is properly funded, ex ante.

2.3.3 EU financial backstops and bank recapitalisation

Once a robust financial framework is operational, including stronger prudential requirements and the ability to resolve banks in an orderly fashion including bail-in, the Commission's estimate is that needs for further recapitalisation will be very rare. If we look at the past, no bank which faced problems since 2008 in the European Union - apart from one exception - would have needed extra recapitalisation (from public funding)  if it had held CRD IV levels of capital and been subject to bail-in.

However, it is always possible that injections of public money might be necessary. That is why at the euro area summit on 29 June 2012, it was proposed that once an effective supervisory mechanism involving the ECB was established for banks in the euro area, the future European Stability Mechanism (ESM) could have the possibility to recapitalise banks directly. This will further contribute to breaking the vicious circle between banks and sovereigns, as the ESM loans would not add to the debt burden of countries facing intense market pressure. The Eurogroup agreed on the main features of ESM direct bank recapitalisation on 20 June, which will be reflected in the operational framework of the instrument.

To reflect the close correlation between two important parts of the new EU financial framework (most importantly the Bank Recovery and Resolution Directive and the Deposit Guarantee Scheme Directive), on which the banking union is based, the Eurogroup agreed that the operational framework will be finalised as soon as these proposals are adopted by the European Parliament.

The ECB should start exercising full supervision one year after the entry into force of the SSM regulation. However, from the entry into force of the SSM Regulation, and upon unanimous request by the ESM, the ECB may immediately take over direct supervision of a credit institution as a precondition for direct recapitalisation from the ESM, following a decision addressed to the national entities and the national supervisory authority concerned.

Full press release

Lithuanian Finance Minister Rimantas Šadžius has assured that the Presidency will do its best to reach the Council agreement on the proposal for the Single Resolution Mechanism by the end of the year so that it could be adopted before the end of the current parliamentary term. By the end of the year the Lithuanian Presidency also expects the co-legislators to adopt the Bank Recovery and Resolution Directive and Deposit Guarantee Schemes Directive.

“Successful conclusion of the Banking Union is crucial for the smooth functioning of the Economic and Monetary Union and financial stability of the entire European Union. It is vital to ensure progress in discussions on the financial stability framework which paves the way to sustainable growth of the European economy”, Minister Šadžius said.

Lithuanian Presidency will seek agreement on key elements of the Banking Union framework

© European Commission