The new Commission college is clearly on the way to create both social and political unions, coped with some other integration prospects for the banking, energy union and digital agenda, to name a few. Not all the EU member states are excited about such deep integration aspirations being afraid of serious reduction of national sovereignty.

 

Present series of publications is aimed at revealing practical steps that the EU institutions (mainly, the Commission) have undertaken for practical implementation of the new Commission’s political guidance for the member states.

 

The series follow those EU policies’ developments that have been, in fact, actively regulated during the last couple of years. The main sources of information for the series are recent Commission’s press releases, EU documents, speeches of the EU officials and various media resources, mainly during 2014-16.

 

Out of ten vital spheres of activities for the next five years elaborated by the Commission, present materials in the series’ volumes are a reflection on recent EU’s actions in certain socio-economic sectors rather than critical analyses, i.e. these are so-called “news & facts collection”, rather than comments; the judgments are that of readers.

 

The series’ publication is envisaged as the quickest way of delivering most recent data on EU’s efforts in social-economic integration development to the wide public, including researchers and students in European studies.

(Modern EU Policies: Integration in Action) 

 

Previous publications in the series are at:

= Vol 1. Modern EU Policies: “EU’s integration through modern European planning process”, 20 July 2015;

= Vol 2. Modern EU Policies: “EU’s efforts to stimulate growth and investment”, 4 September 2015.

= Vol 3-1. Modern EU Policies:  Financial services through EU’s policies and legislation, vol. 3, Part I). 02.02.2016. - Vol 3-2. Modern EU Policies: Financial services through EU’s policies and legislation, vol. 3, part II). 02.02.2016. 

Vol. 4 Banking Union through EU policies and legislation

Introduction. Europe’s crisis has had a great impact on both EU banking and financial system; in fact, more on unsustainable public finances, short-sighted political decisions and sclerotic economic governance. Banking system dysfunction has crippled the European economy from the start of the crisis in 2008 up to mid-2012, when the survival of the euro itself was threatened.

 

Since mid-2012, more energetic European policy efforts have been devoted to bank crisis resolution and the creation of a more sustainable architecture for the EU-28 banking policy, known as banking union. The message was clear: a healthy banking union is an integral part of the solution to securing a prosperous future; hence, Europe’s entire financial system needs to be reformed to strengthen financing, particularly for high-growth businesses, and jumpstart growth. The ambitious goal has been referred to in the new Commission’s political guidance as capital markets union (CMU). However, the banking union and capital markets union both are the two sides of the same coin: creating and safeguarding a more prosperous European Union. With different approaches to financial sector, with specifics in design and execution, these two “unions” necessitate complex –though different- approaches to the main Commission’s agenda: deeper and fairer economic and monetary union (EMU).

http://ec.europa.eu/priorities/deeper-and-fairer-economic-and-monetary-union_en

 

Present publication deals with the following issues: banking union’s background and administration structure, deposit insurance/guarantee scheme (EDIS), banks’ capital requirements as well as their recovery and resolution (single resolution mechanism and fund, SRM & SRF) and European Banking Authority.  

 

Banking union: background. At the core of the banking union is a set of harmonised rules and Commission’s competences, which are applicable to all EU-28 states. Single EU rulebook brings the member states significantly closer to each other; the new regulatory framework establishes common rules for credit and investment institutions in EU-28 states, laying down improved capital requirements for the banking sector, regulating the prevention and where necessary management of bank failures, and ensuring better protection and greater transparency for depositors. Besides, the EU requires a secure and centralised system of decision-making that will address fragmentation concerns.

 

There are two pillars in the banking union (nearing completion), which represent a perspective “common financial utility” as opposed to individual interest.

 

1. First pillar is the Single Supervisory Mechanism, SSM, a critical backbone of Banking Union. Not only in terms of banking sector reform, but also from an internal market point of view, the SSM represents a breakthrough in modern approach to a regulated EU financial sector. Establishing an institution for centralised supervision at European level, the EU will directly address the issue of national financial and banking supervisory authorities.

 

The ECB has been working diligently in building cross-border, cross-cultural supervisory teams that will better reflect the real operations of European significant banks and will help avoid untoward influence. For the first time ever, bank regulators will follow the same detailed supervisory manual in all EU-28 states, enforcing a consistent and comprehensive common approach.

Already from November 2014, the ECB has taken on its full responsibilities with direct supervision of the largest EU banks, having completed an in-depth, comprehensive assessment of banks' balance sheets. The scope of the exercise includes 131 credit institutions across 19 EU euro-zone states, covering around 85% of bank assets in the euro area.  

 

The asset quality review becomes the first of the new banking union “regulatory instrument” to check asset classifications and collateral valuations, while challenging the adequacy of banks' loan-loss provisions, capital and leverage. The stress test, which is accompanied by a similar exercise by the EBA covering all EU member states, will assess bank balance sheets' resilience under stress scenarios. These elements will ensure that the ECB has a clear view of directly supervised banks from the outset, which is a difficult and heavy exercise, but a necessary one. It is for instance thanks to the asset quality review that the problems that were hidden in Banco Espirito Santo, in Portugal, were identified and swiftly and efficiently addressed.

 

The ECB is, moreover, emphasising quality assurance and transparency to secure quality review’s stringency and exercise.

 

To secure financial stability, however, centralised supervisory decision-making must be accompanied by a centralisation of costs in case bank failures do occur: whoever takes the decision must be able to face its financial consequences. The banking union will put an end to situation when supervisory decisions were taken at European level, but the bill for possible supervisory failures remained in national financial authorities.  

 

2. The second pillar of the banking union is the Single Resolution Mechanism, which allows bank resolution, especially in cross-border cases, to be managed more effectively and efficiently. The framework established by the Bank Recovery and Resolution Directive already means that bank failures can be tackled in a more orderly fashion by giving authorities the tools they need to keep critical functions alive. Under the Single Resolution Mechanism, common decision-making taken by a Single Resolution Board and financing from a Single Resolution Fund will produce additional advantages for the system as a whole. The introduction of clear bail-in requirements will also help reducing moral hazard and limiting to the maximum extent possible the direct exposure of taxpayers to bank failures. And finally, agreement on an improved Deposit Guarantee Schemes Directive with harmonised coverage, ex-ante funding and faster payout periods will provide more certainty to depositors, an aspect of essence for the resolution framework.

 

Banks in the EU states have been too often constrained in their lending (this is part of the reason why the euro area economy has not bounced completely back yet); the banking union has triggered a process of balance sheet repair, but this process is still far from complete. Banking union refers to the centralization of supervisory and resolution authority in two European-level bodies: a newly created supervisory arm within the European Central Bank (ECB) and a new Brussels-based agency, the Single Resolution Board (SRB).

 

This ECB’s supervisory arm is fully operational and has been the licensing authority for all banks in the euro area since November 2014, just after a year-long comprehensive assessment of the area’s 130 largest banking groups was completed. The SRB is gradually starting operations in 2015 to become fully operational during 2016, when it acquires the authority to “bail in” failing banks by imposing losses on their creditors as well as to use its own resources for bank resolution (the Single Resolution Fund, SRF).

References to the web site: http://www.piie.com/publications/briefings/piieb14-5.pdf

 

Some historic examples… When the financial crisis deepened in 2009, the EU came under heavy criticism for lacking a supervisory system and crisis management approach that adequately reflected its cross-border characteristics and potential for spillovers.

 

Banking Union, with its common framework of rules and powers, accompanied by centralised decision-making and financing, is the answer to that criticism, underlined the Commissioner.

He added that it took more than 200 years for the US to for such a system.

 

The banking union in the EU is a major step and a spectacular breakthrough for EU integration. Citizens may not realise it yet, but for the financial community, it is a game changer as important as the introduction of the euro. The member states have to start experiencing with the new EU bank’s requirements while getting used to more stringent financial rules.

 

The Commission underlined on several occasion that the banking union would amount to a “revolution”: it will change the way the banking sector operates and it will change the way the EU addresses inter-connectedness and spillovers. In short, banking union is about “collectively cutting the Gordian knot that has linked the banks with their Sovereigns for centuries”, once Jyrki Katainen, Vice-President of the European Commission argued.

 

Bottom line: a successful banking union is absolutely necessary for the EU’s comprehensive approach to kick-start growth and investment. Alongside other strands – like the removal of sector-specific barriers to investment in energy, telecoms and transport, pursuing investment-friendly fiscal consolidation, and stepping up structural reforms – it well help to bring Europe back onto a path of stronger growth and job creation.

 

Reference: European Commission, Jyrki Katainen, Vice-President of the European Commission and member of the Commission responsible for Economic and Monetary Affairs and the Euro, SPEECH/14/599 "European Banking Union in the making", 15/09/2014. In:  

http://europa.eu/rapid/press-release_SPEECH-14-599_en.htm

 

Global financial crisis has shown that both deeper economic and monetary union and an integrated banking system are needed for EU-28 (including euro-zone countries) in order to support long-term financial stability. Therefore Banking Union is both a crisis management tool that enables member states to repair the damage done and an instrument for greater financial stability. Hence, “promotion” for banking union started already in September 2014, after a new Commission’s political agenda for the next 5 years was adopted.

 

Thus, at a conference on "European Banking Union in the making" (Lisbon, 15 September 2014), Jyrki Katainen, Commissioner responsible for economic and monetary affairs and common currency underlined basic features of the future EU banking union.

(Note: Mr. Katainen has been at that time a functioning Commissioner for EMU – until the end of October 2014; then Mr. V. Dombrovskis took over as the new vise-president and a commissioner for euro and social dialogue).  

 

First, the EU member states have acknowledged that the banking union has been a necessity; therefore the Commission sees the banking union as providing a stable basis on which to build greater financial stability. Such “union” can help support future growth via a healthier, more resilient banking sector; it can ultimately regain the market confidence the crisis has shattered. Financial fragmentation should diminish while credit to the real economy should be reactivated: that was an important message of the EU comprehensive strategy for growth and investment.

 

For years, the banking sector has often been either the source or an amplifier of shocks. Thanks to the centuries-old (and present) banking-sovereign close link, these shocks have reverberated, weakening national economies, spreading contagion across the EU states.  

 

The financial crisis has made clear that not only for those countries, which share the euro, but for the EU as a whole, a deeper economic and monetary union and an integrated banking system are needed to support long-term financial stability.

 

Therefore the banking union is not only regarded as a crisis management tool to enables the states to repair the damage done by past loopholes or oversights. The main objectives of the banking union are to restore the proper functioning of the internal market by mitigating fragmentation, ending unnecessary national ring-fencing and thus completing the architecture of the economic and monetary union, as well as of the EU as a whole.

 

Another issue in the “bank union” is a structural reform in the whole financial (as well as the banking) sector. The Commission proposed so-called “banking structural reform” in mid-2015 as a vital building block for the banking union itself. The idea, also inspired by the financial crisis’s aftermath, was “to approach” banks’ risky trading activities, which should be separated from “depositing” bank role thus eliminating risky trading activities.

 

Banks’ trading activities have been seen as making market economy more volatile than any other core banking activities. The damaging effect was particularly visible in banks, which were considered “too big to fail”, the status which gave banks access to cheaper public/sovereign funding (which, in turn, could lead to banks’ substantial trading portfolios while creating significant systemic risks).

 

Therefore, the EU banking “structural reform” was aimed at separating (or/and preventing) such systemic risk from trading activities. In various occasions, through a size-based approach, the greater numbers of trading activities have led to greater risks.  

 

There are numerous financial instruments used by banks by type and by liquid assets, as well as by the issuers and their maturity). Hence, the ability of banks to bear risks differs depending on their capitalisation, the “portfolio quality”, the deposit’s base, etc. Therefore, banks’ structural reform shall deal with both the aggregate size of trading activities (in order to determine risks) and, at the same time further scrutiny banks entire activities.  

The latter aspects in the banking structural reform raised concerns in some EU states claiming that the initial Commission proposal relied too heavily on size-related criteria to determine the need for the separation of trading activities, while failing to properly capture particular risks arising from those trading activities. These discussions have been going on since the end of 2014; some states have even insisted that a more risk-based approach was needed to assess risks from trading activities. That means that national/EU supervisors should look at specific risk criteria (that are commonly accepted in the financial industry) for individual trading units to determine whether or not trading activities should be separated.

 

Additionally, as events in financial markets can develop quickly, the supervisors should also look at qualitative criteria aimed at ensuring the adequacy of internal procedures in preventing the build-up of excessive risks, thus acting preventively rather than reactively.

 

The establishment of the Capital Market Union is not the goal of the Banking Structural Reform: significant interconnections within the financial market need to be considered when dealing with the banking structural reform. National financial market supervisors have to carefully consider both costs and benefits of separating financial market-making activities: risk-based approach to assessing the need for separation is the right approach, but this cannot work unless the competent authorities are given the discretion to consider both the risks and benefits of market making or client activities for the real economy before making any decision on separation. This is essential in order to reach the balanced outcome required for the development of the real economy. Some of these issues are dealt with in another EU governance tool, the European Semester. 

 

Completing banking union: deposit insurance schemes in EMU.  Banking union’s completion has been constantly regarded as an indispensable part in achieving a full and deep Economic and Monetary Union (EMU). However, additional steps are needed, in particular, about implementing European Deposit Insurance Schemes, EDIS in the member states. Commission presented in November 2015 a communication to the member states on reducing risks in the financial system in general and in the banking union, in particular, as financial stability and the confidence of citizens are indispensable preconditions for economic growth. A proposal for EDIS, as suggested by the Five Presidents' Report, consisted of a reinsurance of national Deposit Guarantee Schemes (DGS) as a first step, moving towards a full European system of deposit guarantees in the longer term. The national DGS are already in place and provide for the protection of € 100.000 per person/per account per bank; the common European scheme is needed as a back-up.  

 

EDIS is deemed to help reinforcing depositor confidence in banks within the EU banking union: thus, pressure on banks would be reduced and the loop between banks and the EU states would be further weakened by helping to ensure that all national DGS would have sufficient funds available to weather periods of high stress.

 

The Commission emphasized in November 2015 the need for all EU states to implement fully the agreed rules of the Banking Union. Together with the EDIS proposal, the Commission also presented concrete ideas about how risks can be further reduced in the financial system in general and in the Banking Union, in particular.

 

Prepared in June 2015, Five Presidents' Report formulated a number of steps to further strengthen EMU. One of them was to move towards guaranteeing deposits at the EU level with a European Deposit Insurance Scheme (EDIS). See the Report on:

http://ec.europa.eu/priorities/publications/five-presidents-report-completing-europes-economic-and-monetary-union_en

 

EDIS would mark an important step forward in terms of reinforcing financial stability by reducing the link between banks and sovereigns, and it would enhance confidence by protecting citizens' deposits at the European level, independent of their bank's location in the union. As a first step, it would be based on a system of reinsurance.

 

The Commission's proposal (November 2015, mentioned above) was accompanied by a Communication with concrete measures to further reduce risks in the financial system.

Commenting on the perspectives, Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, underlined that financial stability was a precondition for economic growth and convergence. Thus, completion of the banking union has been regarded as one of the pillars of a resilient and dynamic Economic and Monetary Union.

 

The Commission’s ideas demonstrated the EU’s commitment towards EU Deposit Insurance Scheme; in parallel, the Commission was working on further reducing risks in the banking sector.

 

Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union, added that an “unfinished business” on the banking union (alongside supervision and resolution) restricts an effective system for deposit guarantees. By gradually developing the EDIS at the European level, the Commission will reinforce the confidence that depositors have in their banks, and further weaken the link between banks and their sovereigns.  

 

Managerial/administration features. The banking union is managed by Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), which is responsible for initiatives and implementation of the EU “banking policy” and in the area of Banking and Finance. DG FISMA is based in Brussels and has a staff of approximately 380 civil servants; it works under the political authority of Commissioner Jonathan Hill and is managed by Director General Olivier Guersent.

 

DG FISMA contributes to Commission’s “political project in financial sector & banking” steered by Vice-Presidents Jyrki Katainen (in charge of Jobs, Growth, Investment and Competitiveness) and Valdis Dombrovskis (in charge of the Euro and Social Dialogue).

 

More information on:

= Banking Union; = Completing Economic and Monetary Union; = Five Presidents' Report; and  

= Economic and Monetary Union;

= Commission press release IP-15-6051 “European Commission holds orientation debate on how to complete the Banking Union”, Brussels, 11 November 2015, in:

http://europa.eu/rapid/press-release_IP-15-6051_en.htm?locale=en

 

Capital requirements for EU banking sector. The European Commission has adopted (June 2015) an implementing act aimed at extending the transitional period for capital requirements for EU banking groups’ exposures to central counterparties (CCPs) under the Capital Requirements Regulation (CRR). The CRR introduced a capital requirement for the exposures of EU banks and their subsidiaries to a CCP.

 

Central counterparties (CCPs) are commercial entities which are interposed between the two counterparties in a transaction, becoming the buyer to every seller and the seller to every buyer. A CCP's main purpose is to manage the risk that could arise if one counterparty is not able to make the required payments when they are due – i.e. defaults on the deal. The size of the requirement depends on whether a CCP is labeled as 'qualifying' or not. Capital charges for exposures to non-qualifying CCPs are higher.

 

 In order for a CCP to be considered a 'qualifying' CCP, it has to be either authorised (for those established in the EU) or recognised (for those established outside the EU) in accordance with the rules laid down in the European Market Infrastructure Regulation (EMIR).

 

 Since the process of authorisation and recognition takes time, the CRR provides a transitional period during which these higher requirements will not be applied, to ensure a level playing field for EU’s CCPs (the transitional period expired in June 2015).

 

 As the authorisation and recognition processes for existing CCPs serving EU markets will not be fully completed by that date, the European Commission has adopted an implementing act that would extend the transitional phase to 15 December 2015. This extension period will smooth implementation for CCPs that were still in the process of reauthorisation under our new rules.

The extension is also applicable to third country CCPs seeking recognition in the EU. Only CCPs established in a third country which the Commission has determined to be equivalent as regards its CCP requirements can be recognised in the EU. The Commission recently adopted decisions of equivalence for Hong Kong, Japan, Singapore and Australia, which paves the way for CCPs from those jurisdictions to now obtain qualifying status. However, other jurisdictions do not have equivalent status yet.

 

Equivalence assessments are a detailed and time-consuming process. This extension will allow for that work to continue and for capital relief to continue applying as envisaged in respect of CCPs that have not yet been able to obtain recognition by the European Securities and Markets Authority (ESMA).

 

EU Commissioner responsible for financial stability and services (Jonathan Hill), underlined that the above mentioned measures would give the market the needed legal certainty.

 

For more information on CRR/CRDIV package:

= http://europa.eu/rapid/press-release_MEMO-13-690_en.htm; and 

= European Commission, Press release “European Commission extends transitional period for capital requirements for banks' exposures to CCPs”, 4 June 2015. In: 

http://europa.eu/rapid/press-release_IP-15-5102_en.htm?locale=en  

Reference: Fostering supervisory convergence in European financial markets. 05.06.2015. In: eng/analytics/?doc=107127;

 

Bank’s recovery and resolution. Since 2008, the European Commission has adopted number of measures to ensure the stability of financial and banking services. The Bank Recovery and Resolution Directive (BRRD) was adopted in Spring 2014 to provide authorities with comprehensive and effective arrangements to deal with failing banks at national level, as well as cooperation arrangements to tackle cross-border banking failures (see IP/12/570).

 

Under BRRD, banks are required to prepare recovery plans to overcome financial distress. Authorities are also granted a set of powers to intervene in the operations of banks to avoid them failing. If they do face failure, authorities are equipped with comprehensive powers and tools to restructure them, allocating losses to shareholders and creditors following a clearly defined hierarchy. They have the powers to implement plans to resolve failed banks in a way that preserves their most critical functions and avoids taxpayers having to bail them out.

There are precise arrangements setting out how home and host authorities of banking groups should cooperate in all stages of cross-border resolution, from resolution planning to resolution itself, with a strong role for the European Banking Authority to coordinate and mediate in case of disagreements.

 

National resolution funds are also being established. In the case of euro area states, these funds will be replaced by the Single Resolution Fund as of 2016.

 

The BRRD is being further complemented by technical rules developed by the European Banking Authority on a number of subjects, including concrete information requirements for recovery and resolution plans and securing accurate valuations of assets and losses at the point of resolution.

 

The European Commission has requested Bulgaria, the Czech Republic, France, Italy, Lithuania, Luxembourg, the Netherlands, Malta, Poland, Romania and Sweden to fully implement the Bank Recovery and Resolution Directive (BRRD). This Directive (2014/59/EU) is a centerpiece of the EU's Banking Union that was put in place to create a safer and sounder financial sector in the wake of the financial crisis.

 

The new BRRD rules equip national authorities with the necessary tools and powers to mitigate and manage the distress or failure of banks or large investment firms in all EU Member States. The objective is to ensure that banks on the verge of insolvency can be restructured without taxpayers having to pay for failing banks to safeguard financial stability. Instead, they provide for shareholders and creditors of the banks to pay their share of the costs through a "bail-in" mechanism.

 

The deadline for the transposition of these rules into national law was 31 December 2014 (see IP/14/2862). However, 11 EU countries have failed to implement these rules into their national law by that time.

 

The Commission's request takes the form of a reasoned opinion, the second stage of the EU infringement procedures. If these countries fail to comply within two months, the Commission may decide to refer them to the EU Court of Justice.

 

For more information, see MEMO/14/297 and MEMO/14/597; = On the May infringement package decisions: MEMO/15/5053; = On the general infringement procedure, see MEMO/12/12; = For more information on infringement procedures:        
http://ec.europa.eu/eu_law/infringements/infringements_en.htm;

= General reference: http://europa.eu/rapid/press-release_IP-15-5057_en.htm?locale=en

 

The European Deposit Insurance Scheme would reinforce financial stability. Initially, the Commission proposed a euro-area wide insurance scheme for bank deposits (November 2015) and has set out further measures to reduce remaining risks in the banking sector in parallel.

As implementation measures were new measures set out in the Five Presidents' Report to strengthen the EU's economic and monetary union and Commission’s legislative proposal to guarantee citizens' deposits at the euro area level. The proposal is accompanied by a Communication, which set out other measures to further reduce remaining risks in the banking system in parallel to the work on the EDIS-proposal.

 

The banking union strategy has been implemented step by step by shifting supervision to the European level, establishing a single framework for bank crisis management and, a common system for deposit protection.

 

While the first two steps have been achieved by the establishment of the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM), a third step was a common system for deposit protection.

 

The Five Presidents' Report (22 June 2015) and the Commission's follow-up Communication (21 October 2015) set out a clear plan for deepening Economic and Monetary Union (EMU), including steps to further limit risks to financial stability.

See: Five Presidents' Report of 22 June 2015 on "Completing Europe's Economic and Monetary Union" http://ec.europa.eu/priorities/economic-monetary-union/docs/5-presidents-report_en.pdf;

 

Completing the Banking Union is an indispensable step towards a full and deep EMU. For the single currency, a unified and fully integrated financial system is important for effective monetary policy transmission, better absorption of economic shocks through adequate risk diversification across EU states, and general confidence in the euro area banking system.

According to the Five Presidents’ Report, a European Deposit Insurance Scheme (EDIS) was seen as the third pillar of the Banking Union.

 

There are the following EDIS’ key points:

 

- built on the existing system, composed of national deposit guarantee schemes set up in line with European rules; individual depositors will continue to enjoy the same level of protection (€100 000);

- introduced gradually, step by step;

- overall cost-neutral for the banking sector: the contributions banks make to EDIS can be deducted from their national contributions to deposit guarantee schemes;

- risk-weighted; riskier banks will pay higher contributions than safer banks, and this will be strengthened as EDIS is introduced gradually; risk adjustments will apply from the outset

- accompanied by strict safeguards: for example it will only insure those national DGS which comply and are being built up in line with EU rules;

- accompanied by a Communication setting out measures to reduce risks, such as future proposals to ensure that banks’ exposures to individual sovereigns risk is sufficiently diversified; and

- mandatory for euro area states whose banks are today covered by the Single Supervisory Mechanism; but open to other EU states which want to join the banking union.

Three evolving steps towards EDIS

Phase 1: Re-insurance. The Commission's proposal starts with a re-insurance approach, which would last for 3 years until 2020. The approach will work in the following way:

 

- In the re-insurance phase, a national DGS could access EDIS funds only when it had first exhausted all its own resources; and – as in all further phases – if it complied with the DGS Directive.

- EDIS funds would provide extra funds to a national scheme, but only up to a certain level.

 

There will be safeguards to ensure that national schemes can access the EDIS only when justified, and to address possible moral hazard. In particular, EDIS funds would only be available if the relevant rules in the DGS Directive have been fully applied by the EU state concerned. Any use of EDIS funds will be closely monitored. Any EDIS funds that are found to have been received inappropriately by a national scheme will have to be fully reimbursed.

 

This first re-insurance step would weaken the link between banks and their national sovereigns. But more is needed to provide full insurance for national schemes to fall back on and ensure that all retail deposits in the banking union enjoy an equal level of protection. This is why a second step is needed.

 

Phase 2: Co-insurance. After 3 years as a re-insurance scheme, in 2020 EDIS would become a progressively mutualised system ("co-insurance"), still subject to appropriate limits and safeguards against abuse.

 

The key difference in this phase is that a national scheme would not be required to exhaust its own funds before accessing EDIS funds. EDIS would be available to contribute a share of the costs from the moment that bank depositors need to be reimbursed. This introduces a higher degree of risk-sharing between national schemes through EDIS. The share contributed by EDIS will start at a relatively low level (20%) and will increase over a four year period.

 

Phase 3: Full insurance. By gradually increasing the share of risk that EDIS assumes to 100%, EDIS will fully insure national DGS as of 2024. This is the same year when the Single Resolution Fund and the requirements of the current DGS Directive will be fully phased in.

Besides, the European Deposit Insurance Fund would be created from the outset. It will be financed directly by bank contributions, adjusted for risk. Management of the European Deposit Insurance Fund would be entrusted to the existing Single Resolution Board.

 

Risk reduction measures. Alongside introducing EDIS and in parallel to the work on the legislative proposal, the Commission will pursue a full package of measures to reduce risks and ensure a level playing field in the Banking Union.

 

These include:

 

-  Reducing national options and discretions in the application of prudential rules so that the Single Supervisory Mechanism (SSM) can operate as effectively as possible;

-  Harmonising national DGS;

-  Legislating to implement the remaining elements of the regulatory framework pertinent to banks agreed at international level, in particular to limit bank leverage, to assure stable bank funding and to improve comparability of risk-weighted assets, and to enable implementation by 2019 of the Financial Stability Board's recommendations on Total Loss Absorbing Capacity for banks, so that adequate resources are available for failing banks without resorting to taxpayers.  

-  Enforcing existing rules so that the use of public funding to maintain a solvent and resilient banking sector is minimized;

-  Greater convergence in insolvency law as set out in the Capital Markets Union Action Plan;

-  Initiatives as regards the prudential treatment of banks' exposure to sovereign risk, such as limiting banks' exposures to a particular sovereign to ensure risk is diversified.

Alongside these actions, the Commission will work to ensure full transposition by the member states of existing legislation in this field, such as the 2014 Directives on Bank Recovery and Resolution (BRRD) and Deposit Guarantee Schemes. Where relevant, infringement proceedings have already been launched to this end (see IP/15/5827).

 

More information on the issues: = Memo/15/6153;

= Communication in: http://ec.europa.eu/finance/general-policy/docs/banking-union/european-deposit-insurance-scheme/151124-communication_en.pdf;

= Proposal in: http://ec.europa.eu/finance/general-policy/docs/banking-union/european-deposit-insurance-scheme/151124-proposal_en.pdf;

= Commission’s Factsheet in: http://ec.europa.eu/finance/general-policy/docs/banking-union/european-deposit-insurance-scheme/151124-factsheets_en.pdf; and

= General reference in: http://europa.eu/rapid/press-release_IP-15-6152_en.htm?locale=en.

 

Single Resolution Mechanism (SRM): preserving EU’s financial stability. The Single Resolution Mechanism (SRM) has become fully operational from January 2016: a milestone on building the banking union for the euro area has been reached. The SRM will bolster the resilience of the financial system and help avoid future crises by providing for the timely and effective resolution of cross-border and domestic banks.

 

The EU has already taken significant steps during last two-three years to address the roots of the financial crisis, to ensure that banks are much better capitalised and more effectively supervised while identifying possible risks in the financial system. But despite closer supervision and a greater emphasis on crisis prevention, there may still be cases of banks getting into difficulty.

The SRM Regulation established the framework for the EU states participating in the Banking Union when banks need to be resolved.

 

The Single Resolution Mechanism was proposed by the Commission on 10 July 2013 (see IP/13/674). The regulation entered into force on 19 August 2014.

 

The provisions relating to the cooperation between the Single Resolution Board and the national resolution authorities for the preparation of the banks’ resolution plans has been applied from the start of 2015.

 

The SRM implements the EU-wide Bank Recovery and Resolution Directive (BRRD) in the euro area. The full resolution powers of the Single Resolution Board (SRB) have been also intended to apply from January 2016 (see IP/14/2784).

 

Commissioner Jonathan Hill underlined that the EU banking union has had already the tools to supervise the banks within the euro area. The Single Resolution Mechanism will make a system for resolving banks and of paying for resolution so that taxpayers would be protected from having to bail out banks if they go bust.

 

He stressed that “no longer would the mistakes of banks be borne on the shoulders of the many”.

http://europa.eu/rapid/press-release_IP-15-6397_en.htm

 

The SRM as part of the banking union. The SRM provides that the Single Resolution Fund (SRF) will be built up over a period of 8 years with 'ex-ante' contributions from the banking industry. EU member states agreed to define some of the rules, particularly relating to the transfer of those contributions from National Resolution Authorities to the SRF, and for the progressive mutualisation of their use over time, in an inter-governmental agreement (IGA).

 

The IGA was part of the overall compromise reached by the EU states and the European Parliament on the SRM in March 2014, and sits alongside the SRM Regulation (IP/15/6258). It was ratified by a sufficient number of participating states in November 2014.

 

The Banking Union is mandatory for all euro area states and consists of 19 members (in 2016): Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. Any other EU states wanted to join the Banking Union they need to join its all three parts, namely: supervision, resolution and EDIS.

 

The SRM’s functions. The Single Resolution Mechanism works in the following manner:

 

·         The Single Supervisory Mechanism (SSM), as the supervisor, would signal when a bank in the euro area or established in a Member State participating in the Banking Union is in severe financial difficulties and needs to be resolved.

·         The Single Resolution Board (SRB), consisting of representatives from the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries), the SSM and the European Commission, will carry out specific tasks to prepare for and carry out the resolution of a bank that is failing or likely to fail. The SRB decides whether and when to place a bank into resolution and sets out, in the resolution scheme, a framework for the use of resolution tools and the Single Resolution Fund (SRF).

·         The resolution scheme can then be approved or rejected by the Commission or, in certain circumstances, by the Council within 24 hours.

·         Under the supervision of the SRB, national resolution authorities will be in charge of the execution of the resolution scheme.

·         The SRB oversees the resolution. It monitors the execution at national level by the national resolution authorities and, should a national resolution authority not comply with its decision, directly addresses executive orders to the troubled banks.

·         An SRF was set up under the control of the SRB. It will ensure the availability of funding support while the bank is resolved. It is funded by contributions from the banking sector. The SRF can only contribute to resolution if at least 8% of the total liabilities of the bank have been bailed-in.

 

The SRM has certain benefits for the EU banks. In the EU banking union, the Single Resolution Mechanism (SRM) allows for:

 

·         More uniform financing conditions for individuals and businesses, thanks to a single mechanism to deal with the failure of banks irrespective of the EU state’s origin, reducing the interdependence between credit supply and the health of public finances;

·         Enhanced preservation of financial stability, with a more predictable environment for consumption and investment decisions, through centralised crisis management for large and cross-border banks, whose disorderly failure could otherwise cause contagion and panic;

·         Reinforced protection of taxpayers via the bail-in tool and if necessary a single resolution fund pooling financial resources for crisis management, to be provided by banks ex-ante, across all participating Member States.

 

More information on SRM are in the following websites: = Banking Union: MEMO/15/6164; = http://ec.europa.eu/finance/general-policy/banking-union/index_en.htm; = SRM: MEMO/14/295 and MEMO/14/475; = http://ec.europa.eu/finance/general-policy/banking-union/single-resolution-mechanism/index_en.htm; and on = Single Resolution Board: http://srb.europa.eu/. 

 

Strengthening the banking union: European banking authority. The rules for the EU single market and the work of the banking authority (EBA) in the last five years strengthened the regulation and supervision of European banking sector. Radical overhaul of EU's regulatory and supervisory framework for banks (with about forty separate pieces of legislation) played an important role in making EU’s financial system more secure.

 

The single rulebook for the banking sector was at the heart of the EU’s response to the crisis, and the European Banking Authority (EBA) has helped deliver a consistent rules’ application across the single market. Due to the new regulatory framework, the Europe’s banks are now stronger and better capitalised. They hold higher levels of liquidity, and the disclosure of data has gone a long way to restore confidence across the banking sector.

 

In November 2015, the EBA published detailed information on over a hundred banks from twenty-one EU countries. The results confirmed that Europe’s banks are increasingly resilient. This greater transparency, which the EBA has helped to bring, has been a central part of the EU’s response to the financial crisis. However, some problems still exist, e.g. non-performing loans that weigh on some parts of the banking sector.

 

Among most important part of EBA’s legislation are, e.g. the Capital Requirements Regulation and the Bank Resolution and Recovery Directive, which helped to create the EU banking union, a Single Supervisor and a Single Resolution Authority.

 

This approach fits into the Commission's broader objective of regulating better and regulating less. In 2016 the Commission will proposed 80% fewer laws than was usual each year under the last Commission. Besides, the Commission is reviewing two and half times as much legislation as in previous years to check whether it is working as intended.

The intention is also to have simpler rules for banks and businesses. In the financial services the idea was to keep rules as simple as possible: the more complex they are, the more are regulatory risks, which can make it harder for managers to take responsibility. Rules in financial/banking sector have to be proportionate, related to risk, and drawn up in way that reflects different business models and sizes. Striving for financial stability, the Commission is keeping an eye on growth, which is one of the biggest threats for the financial stability and European businesses.

 

This is the approach to legislation the Commission would bring forward in 2016 to implement the Total Loss Absorbing Capacity requirement, to approach issues like the Net Stable Funding Ratio, NSFR, and on the Leverage Ratio. The Commission is preparing for preliminary discussions with the member states and the European Parliament on a proposal on these rules’ application.

 

At the same time, the Commission will check already adopted legislation, the process which lies behind the cumulative impact assessment of the financial services legislation, which was launched in 2015.

However, some concerns are raised: quire often rules getting in the way of the diversity of the EU financial sector: compliance burdens linked to the duplication of reporting requirements; and unintended consequences like the impact of the rules on lending and market liquidity. Thus, the Commission is presently reviewing the responses, weighing up the evidence, before deciding whether change is needed and how it shall be done. As part of a separate exercise, the Commission is carrying out a review specific to the Capital Requirements Regulation (CRR).

This regulation and its “sister directive” CRD4, has a prudential objective to impose the lowest possible administrative burden on banks so that they can provide lending to the wider economy. So, the idea is to simplify reporting requirements and costs that are associated with compliance; i.e. to tighten legislation up, correct technical mistakes, and give more certainty to businesses.

The Commission would take a more proportionate approach to smaller banks and take a close look at whether it really makes sense to have the same compliance requirements for all banks and all business models.

Commission wants to increase banks’ facilities to investment. In order to encourage investment in infrastructure, the Commission intends to look at whether lower capital requirements (like the ones applied to SME lending) and a better recognition of the risk associated with infrastructure projects, could play a part in improving long term investment.

 

Another area (as part of the CRR Review) is additional Pillar 2 requirements: some differences are known as to how these rules are applied by supervisors: the Commission wants to make the rules clearer, so that the legislation can work as it was originally intended. 

 

 There needs to be a clear difference between the goals of Pillar 1 requirements that apply to all banks, and Pillar 2 requirements that are bank specific and depend on the level of additional risk that banks bear.  This will help meet the EU goal of preserving financial stability and supporting banks' competitiveness: the recommendations on this and other areas being considered under the CRR Review later in 2016.

EDIS – third leg in EMU. At the end of 2015, The Commission came forward with a proposal to put in place a European Deposit Insurance Scheme (EDIS) by 2024 as part of a broader plan to deepen Economic and Monetary Union. It aims to give the Banking Union the “third leg” alongside a single supervisor and a single resolution authority.

 

The plan is to move from a single system of deposit guarantee schemes to a scheme that will underwrite deposits across the whole Banking Union. Depositors already have the confidence of knowing that their deposits are guaranteed up to €100,000 if their bank goes bust. EDIS is a Banking Union wide scheme that would make banks better protected if there were larger local shocks.

 

The same level of protection will continue to apply to depositors throughout the EU-28; it should be cost neutral for the banks because contributions to EDIS would be deducted from what banks pay into their national DGS. And there would be strong safeguards against moral hazard.

Alongside EDIS, there are several measures to reduce risks: e.g. keeping up the pressure for the full application of already agreed legislation; the new resolution framework needs to be fully incorporated into national legislation, and the Deposit Guarantee Scheme directive should also be fully transposed.

 

By the end of 2016, the Commission will bring forward legislation to address the most important barriers to the free flow of capital, building on national regimes; at the same time it will continue to work on national options and discretions. While some are there for a good reason, and are used to take account of specific circumstances in different countries, supervisors need to be able to compare banking services: it is important to avoid differences in rules that stand in the way of competition and trade across the EU single market.

 

Despite the challenges, the EU banking sector is much stronger today than before the EBA was born five years ago. But efforts to seek stronger financial stability are still needed, e.g. in striking balance to keep banks safe and return them to the mainstream of the member states’ economy and business. For that to happen, the banks have to recognise their obligation to act responsibly, to provide a lead, to drive forward improvements in conduct and behavior.

 

Working together – banks, supervisors and regulators – can keep the EU banking sector strong, reduce risk, but also support the investment and growth.

 

Reference: European Commission, press release “Keynote speech by Commissioner Jonathan Hill at the European Banking Authority's 5^th Anniversary Conference”, London, 5 February 2016. In: http://europa.eu/rapid/press-release_SPEECH-16-250_en.htm?locale=en  

 

Literature for EU banking reforms:

- The EU new plans for safer banks. 03.02.2014.

- Waiting for the banking union to come…08.04.2014.

- Reviews on the European System of Financial Supervision. 11.08.2014.
- Commission’s promoting the Banking Union. 16.09.2014.

 

References for other items in the EU banking union:

- National promotion banks to stimulate investments into real economy. Eugene Eteris, European Studies Faculty, RSU, Latvia, 24.07.2015.
- EU’s bank supervision: a year after. Eugene Eteris, European Studies Faculty, RSU, 09.11.2015. 
- Completing banking union: deposit insurance schemes. 12.11.2015.
- Single Resolution Mechanism: preserving EU’s financial stability. 05.01.2016.