European Banking Union: The unfinished agenda for a changing Europe

Ivaylo Iaydjiev (St Antony’s College, Oxford)

Speaker: Christos Gortsos, Law School of the National and Kapodistrian University of Athens

Chair: Adam Bennett, St Antony’s College, Oxford

The decision on 29 June 2012 to go ahead with the creation of the European Banking Union (EBU) is often seen as a key turning point in the euro area crisis. The stated goal was, boldly, to “break the vicious circle between banks and sovereigns”. In his talk four years later Prof. Christos Gortsos took stock of how far this has been accomplished and what remains unfinished. In particular, he focused on the key asymmetries in the three main pillars of the EBU: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the prospective European Deposit Insurance Scheme (EDIS).

Prof. Gortsos began by drawing an important distinction between rules and institutions. According to him, the harmonized rules that form the Single Rulebook are a byproduct of the Global Financial Crisis and are based on global rules such as Basel III or FSB recommendations. However, the EBU represents an evolution in the institutions that implement such rules. Thus, by addressing the asymmetry between increasingly Europeanized rules and their enforcement by national authorities, the EBU should be regarded as a specific consequence of the euro area crisis. The change has perhaps been most visible in the area of supervision with the creation of a dedicated pan-European SSM. However, even here some asymmetries continue. First, the SSM supervises directly 129 banks that account for over 80% of total banking assets. This still leaves all others under the supervision of their nationally competent authorities. Second, the majority of the rules apply only for euro area countries, but non-euro area states can also apply for close cooperation. Whereas this has not yet happened, it raises the possibility that the SSM would be supervising more banks in more countries than those within the monetary union. In addition, Prof. Gortsos notes, not all aspects of supervision have actually been transferred to the SSM as anti-money laundering actions, consumer protection, and rules pertaining to insurance and capital market regulations are still within the competency of national authorities. 

Moving to resolution, Prof. Gortsos highlighted how the time pressure and the need to preserve existing treaties shaped the approach to the SRM. As he explains, under the new rules, a credit institution only enters resolution if it fulfills three criteria: 1) it is failing or likely to fail; 2) resolution is in the public interest; and 3) there is no prospect for a private sector solution. Thus, the opportunities for a bailout are reduced to minimum in cases of precautionary recapitalization or following a bail-in of at least 8% of the liabilities of the institutions. Decisions on resolution and the use of common funding for institutions under the SSM are made by the Single Resolution Board (SRB), a European agency based on Brussels.

Several consequences stem from this. In particular, the SSM has a legal anchor in the European treaties and is housed within the ECB. The SRB, however, is a typical EU agency with no legal anchor and hence with limited responsibilities. In case of a resolution, decisions need to be taken with the participation of both the European Commission and the European Council, under severe time pressure. Such decisions include whether to use the Single Resolution Fund (SRF) to cover financing gaps that arise from resolution actions. The SRF is financed by contributions by credit institutions and is gradually mutualized, with a total size of around 60 bn euros by 2024. However, given the new framework actively discourages bailouts, questions remain whether the adequacy in both size and decision-making of such a European resolution scheme.

The unfinished agenda of the EBU is most clear in relation to its third pillar, deposit insurance in case a bank is closed down. However, the EDIS is still in the negotiation stage, with significant resistance, which means that it is unlikely to be established by 2024 as envisaged. A further note on the ‘to do list’ is to reconsider the convoluted system of providing lender of last resort (LoLR) facilities. Currently, these are provided by national central banks, and whereas the ECB can oppose such decisions, potential losses fall on the national balance sheets of central banks. As LoLR should in theory be provided only to solvent banks, this would require coordination between national resolution authorities, the SSM, and the national central bank. Finally, proposals on limiting sovereign bonds in bank holdings are still under negotiation, whereas the 0% risk-weighting attached to government bonds remains. 

In his conclusion, Prof. Gortsos outlined some of the future challenges for European banking that go beyond new institution-building. The combination of negative interest rates with the overregulation of the banking system globally and the emergence of fintech might, according to him, replace bank-based financing with more market-based approaches. This would not only be a new model for most of continental Europe, but raises additional questions – notably whether new financial companies and the risks they carry might fall outside the spectrum of the institutions we are so painstakingly current constructing in the EU.