Policy Brief - The Next Goal: Euro Area Banking Integration

The banking union is ten years old. Is it dated already? In a sense yes: economic conditions and priorities have changed since mid-2013, when the EU legislators adopted, in an unprecedented tour-de-force, the two foundational documents of the new regime: the capital requirements and the Single Supervisory Mechanism regulations. 

The SSM has worked well. The goal of “… rebuild[ing] confidence in the balance sheet of SSM area banks”, pronounced by Chairwoman Danièle Nouy in 2014, has been achieved; to such point that euro area banks have overcome essentially unscathed the three major challenges of the early 2020s: the pandemic, the recession and the US banking turmoil of March 2023.

Yet, the banking union remains deficient in several respects. One long-identified shortcoming concerns the framework to deal with banking crises. Recognizing that it has not worked as expected, the Commission has proposed in April 2023 a package of legislative amendments which are now being examined by the EU co-legislators.

More fundamentally, however, what remains spectacularly underachieved and not properly addressed is the underlying objective of creating a true banking union: a single market for banking products and services commensurate to the economic and political dimension of Europe and to the global role she aspires to play.

This paper, prepared on a request by the European Parliament, contributes to a reflection aimed at identifying ways to revive and upgrade the banking union, so as to enable it to cope with the major transformational challenges facing Europe as we move forward in the 21^st century: Green, Digital, Geo-Strategic and Structural. 

In its first part, the paper illustrates the underachievement of Europe’s single banking market and makes three additional points:

1. The lack of a single banking market is costly, always and especially today when Europe faces the historical challenge of enacting the four aforementioned economic and societal transformations: making the economy greener; providing for its own defence; moving up and staying close to the digital frontier; replacing an export-driven economy with one more reliant on domestic demand. 

2. Making progress towards an integrated banking union is easier now than it has ever been in the last decade; hence the time to act is now.

3. Cross-border banking pertains to a small group of banks, having the structure, the culture and the ambition to do so. Regulation should recognize this fact and design cross-border banking norms that fit those subjects specifically, within the general set of rules applying to banks in general.

The second part of the paper examines the legal obstacles to a genuine integrated banking union and sketches a set of legislative amendments that would remove those obstacles.

The overarching goal is to create a single jurisdiction for cross-border banks in the area covered by the banking union, “country blind” from the regulatory, supervisory and crisis management viewpoints.

The main elements of the proposal can be summarized as follows:

• Define a set of structural and prudential criteria that need to be satisfied by the euro area banking groups that conduct, or realistically aspire to conduct, substantial cross-border business;

• Repeal or waive the legal provisions that prohibit the free movement of capital, liquidity and other prudential resources within the banking groups belonging to this category;

• In parallel, strengthen the provisions that govern the internal support within those groups, making them mandatory and enforceable and prescribing that they should be activated, in case of distress, both before and after the entity reaches the point of non-viability;

• Establish that these groups and/or the entities thereof, if declared failing-or-likely-to-fail by the supervisor, would be resolved by the European resolution authority, not liquidated nationally;

• Prescribe that the deposit insurance function for these groups would be performed by a dedicated scheme, contributed by the groups themselves, whereas the existing deposit insurance schemes would retain their functions with regard to banks having a predominantly national business focus.

The proposed package of regulatory amendments, explained in detail in the report, is complex; but no more so than European banking law already is. Would it work? Yes, on two conditions. First, that governments and European institutions unite in pushing forward the above transformations, which are inescapably imposed on Europe by the evolving and increasingly complex global context. Second, no less important, that the banking establishment responds as well, putting Europe at the centre of its business vision rather than taking refuge in the comfort and protection of national borders.

IEP@BU does not express opinions of its own. The opinions expressed in this publication are those of the authors. Any errors or omissions are the responsibility of the authors.

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