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We discuss the contribution of the Banking Union in its current form to market integration in the euro area. While the introduction of single supervision has fostered banking integration, limited progress in single resolution and the absence of a European deposit insurance scheme undermine further advancements. We argue that a significant obstacle to financial integration lies in the persistence of national interests in regulation, supervision, and politics. We also explore the lessons that can be learned from ten years of the Banking Union for the development of the Capital Markets Union and the integration of capital markets. The successes of the Banking Union in common supervision and rule-setting can provide a path forward.
This paper discusses the contribution of single supervision and resolution to market integration in the euro area (EA), including across different segments of the banking market. It also discusses whether and to what extent the Banking Union (BU) experience may provide lessons to foster the capital market union (CMU) project.
Aggregate price- and quantity-based measures of financial integration have only partially increased since the inception of the BU in 2014, reaching levels similar to those observed since the start of the Economic and Monetary Union (EMU) in 1999. However, financial integration remains non-uniform across segments and countries in Europe.
Regarding banking integration, quantity indicators of cross-border exposures have increased primarily due to interbank activities, rather than retail lending and lending to large corporates. Cross-border corporate lending has prevailed over cross-border retail lending and has been concentrated in large banks from European central countries. Conversely, price indicators show a reduction in dispersion across the EA in lending and deposit rates, indicating an increase in financial integration along the price dimension. This may be supported by the low interest rate environment that has prevailed until very recently, along with competition from non-bank financial institutions and fintech/big tech.
Did the BU contribute to financial integration, and how? Do further steps need to be taken to achieve more integrated banking markets?
On the positive side, the introduction of a single supervisor and a single rulebook has determined the application of uniform rules across the EA and the more homogeneous implementation of local regulations. This has helped level the playing field and enhance transparency and comparability. Moreover, capitalisation and risk management practices have also improved, as demonstrated by increased risk-based capital ratios and a reduction in non-performing loans (NPLs). More transparent and sound bank balance sheets are better able to attract depositors and investors. As a result, a large share of unsecured debt securities issued by EA banks is now held outside the banking sector and even outside Europe, contributing to risk-sharing across financial segments and geographies.
On the other hand, two types of obstacles to greater financial integration are still present.
The first obstacle lies in the limitations of the European Union (EU) regulatory framework and the incompleteness of the BU. The current functioning of the BU faces challenges due to impediments in capital and liquidity mobility across borders within cross-border banking groups. These restrictions are partly due to local supervisors’ attitude that tends to protect their national champions, and EU banking legislation, which allows capital waivers within the same country but not across borders. National authorities also impose additional restrictions, leading to inefficiencies in resource allocation and higher costs for cross-border consolidation. Another issue is the severity of the BU's bank resolution framework, established by the Bank Recovery and Resolution Directive (BRRD), which limits its actual application and leads to divergent national practices and an uneven playing field. Finally, the lack of a European Deposit Insurance Scheme (EDIS) is the most significant gap in the BU that reduces depositor protection, discourage cross-border banking, and amplify the tendency of countries to retain financial resources locally.
The second relevant barrier to completing the BU and achieving a truly integrated European banking market is national politics, which impede decisive steps toward harmonization in several key policy areas (such as tax regimes and national legislation on competition, credit, consumer protection). Unless
Can the Banking Union foster market integration, and what lessons does this hold for Capital Markets Union?
PE 760.259 9
national governments are willing to take a backseat with regard to their banking systems, only limited progress seems feasible.
Recently, European authorities have taken additional steps to enhance financial integration. These include the ECB’s 2021 guide on the prudential treatment of mergers and acquisitions and the 2023 European Commission (EC) proposal to reform the crisis management scheme. More importantly, there has been increased debate on how to improve banks’ cross-border consolidation. Proposals range from better utilization of the existing freedoms embedded in EU regulation (see Enria, 2021) to more ambitious projects involving changes in the framework to favor the establishment of a few pan-European banks under new, separate rules (Angeloni, 2024).
Although incomplete, the BU experience may provide some valuable lessons for the CMU project. The successes of the BU in supervision and rule-setting can provide a path forward. A stronger supranational supervisor and better coordination among European financial authorities are essential. Harmonisation of relevant legislations must be promoted, as differences in insolvency laws, accounting practices, and tax regimes continue to create frictions, impeding capital movements and investment diversification.
To reignite interest in the CMU project, policymakers could emphasize the challenges the EU faces in progressing with digitalization and climate transition, which require substantial funding that only frictionless financial markets can mobilize.
Overall, achieving the goal of healthy and sustainable integration requires effort from various parties, with greater commitment from individual governments also necessary.