Australia: European Banking Union


On 19 March 2013, the European Parliament and the European Council reached agreement on a major legislative package entrusting the European Central Bank (ECB) with responsibility for the supervision of banks in the framework of the Single Supervisory Mechanism and adapting the operating rules of the European Banking Authority to this new framework and ensure a balance in its decision-making structures between euro area and non-euro area Member States. This is one of the most significant steps in the creation of an internal market for financial services.

The proposal is part of a three pronged initiative designated as the "Banking Union", of which the part dealing with prudential supervision is called the Single Supervisory Mechanism. The two other parts relate to deposit guarantee systems and recovery and resolution schemes, two subjects about which the Commission has previously tabled proposals that are under discussion in the legislative bodies. (More information about the draft Recovery and Resolution Directive is available here.

The Single Supervisory Mechanism is designed for countries within the eurozone, but is also open to other EU countries.

The Single Supervisory Mechanism will commence supervision from mid 2014.

A European Banking Union for lack of further European fiscal integration?

What is most significant about the Economic and Monetary Union is its asymmetry in the area of fiscal and monetary policies, i.e., the fact that it has separated monetary policy from fiscal policy. The Economic and Monetary Union includes a full monetary union, with a European Central Bank that is generally responsible for decisions relating to the euro, and in which the Member States have thus lost all control. But the Economic and Monetary Union has not yet created a full fiscal or, indeed, economic union: the Union does not conduct its own fiscal policy.

The lack of an integrated EU-level framework and of a mechanism to mutualise the response to risks originating in the banking sector affecting several or all Member States, has contributed to powerful negative loops emerging between the banking system and the sovereign authorities in the vulnerable countries. These loops fuelled the debt crisis further and led to a reversal in the direction of capital flows. While the crisis is now undermining confidence in sovereign debtors, there is the concern, voiced by the European Central Bank and other bodies that the crisis is increasingly breaking up the internal market, and may even endanger the role of the euro as the single currency.

As Member States are not likely to set as a goal in the coming years a common fiscal policy (or a broad economic policy that includes fiscal policy) in order to correct the asymmetry of the Economic and Monetary Union in the area of fiscal and monetary policies, in the short- to midterm, Member States will continue to seek a degree of integration in different ways to address the imbalance between the strong monetary union and the weak economic coordination between the members of the euro area.

Against this backdrop, Members States are likely to seek further economic integration in regulatory areas. The creation of the Banking Union is the most significant sign of such trend. One of the objectives of the Banking Union consists of breaking the link between private and public debt both by ensuring that public debt will not again bye subject to private debt, while private debt is kept under better control. In order to achieve these objectives, the European Institutions want to regulate, supervise or even restructure the banking system in a stronger manner.

Scope of the Single Supervisory Mechanism

The Single Supervisory Mechanism is based on the transfer to the European level of specific, key supervisory tasks for banks established in the euro area Member States and for banks established in non-euro area Member States which decide to join the banking union. The Single Supervisory Mechanism will be composed of the European Central Bank and national competent authorities. The European Banking Authority will retain its role of developing standards and ensuring consistency.

The Single Supervisory Mechanism will cover approximately 6000 banks in the euro area. As recent experience shows that relatively smaller banks can also pose a threat to financial stability, the European Institutions have decided that the ECB will be responsible for the supervision of all banks in the euro area.

The ECB will directly supervise banks having assets of more than EUR 30 billion or constituting at least 20 per cent of their home country's GDP or which have requested or received direct public financial assistance from the European Financial Stability Facility or the European Stability Mechanism. The ECB will monitor the supervision by national supervisors of less significant banks. 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.

What will come next?

Once an effective Single Supervisory Mechanism is established, the European Stability Mechanism could be allowed to offer mutualised support to directly recapitalise banks that fail to raise funds in the market and that cannot be rescued by their home Member State without endangering its fiscal sustainability.

For the time being, the European Stability Mechanism provides financial assistance to euro area Member States experiencing or threatened by financing difficulties. An agreement on the operational framework supporting this possibility should be agreed as soon as possible in the first semester of 2013. This will further reinforce the euro area, by helping to break the negative feedback loop between banks and their sovereign authorities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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