This paper discusses the creation of a European Banking Union. First, we discuss questions of design. We highlight seven fundamental choices that decision makers will need to make: Which EU countries should participate in the banking union? To which categories of banks should it apply? Which institution should be tasked with supervision? Which one should deal with resolution? How centralised should the deposit insurance system be? What kind of fiscal backing would be required? What governance framework and political institutions would be needed?
In terms of geographical scope, we see the coverage of the banking union of the euro area as necessary and of additional countries as desirable, even though this would entail important additional economic difficulties. The system should ideally cover all banks within the countries included, in order to prevent major competitive and distributional distortions. Supervisory authority should be granted either to both the ECB and a new agency, or to a new agency alone. National supervisors, acting under the authority of the European supervisor, would be tasked with the supervision of smaller banks in accordance with the subsidiarity principle. A European resolution authority should be established, with the possibility of drawing on ESM resources. A fully centralized deposit insurance system would eventually be desirable, but a system of partial reinsurance may also be envisaged at least in a first phase. A banking union would require at least implicit European fiscal backing, with significant political authority and legitimacy. Thus, banking union cannot be considered entirely separately from fiscal union and political union.
The most difficult challenge of creating a European banking union lies with the short-term steps towards its eventual implementation. Many banks in the euro area, and especially in the crisis countries, are currently under stress and the move towards banking union almost certainly has significant distributional implications. Yet it is precisely because banks are under such stress that early and concrete action is needed. An overarching principle for such action is to minimize the cost to the tax payers. The first step should be to create a European supervisor that will anchor the development of the future banking union. In parallel, a capability to quickly assess the true capital position of the system’s most important banks should be created, for which we suggest establishing a temporary European Banking Sector Task Force working together with the European supervisor and other authorities. Ideally, problems identified by this process should be resolved by national authorities; in case fiscal capacities would prove insufficient, the European level would take over in the country concerned with some national financial participation, or in an even less likely adverse scenario, in all participating countries at once. This approach would require the passing of emergency legislation in the concerned countries that would give the Task Force the required access to information and, if necessary, further intervention rights. Thus, the principle of fiscal responsibility of respective member states for legacy costs would be preserved to the maximum extent possible, and at the same time, market participants and the public would be reassured that adequate tools are in place to address any eventuality.
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André Sapir 24th July 2012
The 2010 Bruegel paper by Dewatripont, Nguyen, Praet and Sapir fully acknowledges the important contribution of DG Competition in improving bank resolution in the aftermath of the 2008-9 financial crisis. It argues, however, in favour of a separate European Resolution Authority, with DG Competition still playing a crucial role to ensure that resolution does not distort the Single Market http://www.bruegel.org/publications/publication-detail/publication/404-the-role-of-state-aid-control-in-improving-bank-resolution-in-europe/
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Christian Deubner 23rd July 2012
OK, in the text the Commission is after all extensively referred to. So why no mention in the summary, and why only "ECB and a new agency, or to a new agency alone" in the institutional set up imagined by Bruegel?
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Christian Deubner 23rd July 2012
Funny, I never read about an involvement of the European Commission DG Competition in the banking union debate, even though this DG is the only institution I know which has first assembled a rich know-how about analysing and evaluating national bank rescue projects in the EU from 2008 to 2010 and secondly created and extensively debated a bank resolution scheme with Member states. Where and how will this knowledge be exploited for the banking union project ?????
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AUVE 2nd July 2012
Very interesting but many people don't read enough fluentrly english to be able to understand the whole article. Isn't it possible to have translations into French or German ? It would be nice for them
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