A new impetus for the Banking Union?

ABBL Published 23.03.2021

In the last year the economic repercussions of the COVID-19 pandemic, the build-up of non-performing loans on banks’ balance sheets, several (national) resolutions of mid-sized banks, low profitability as well as stiff competition from outside the traditional banking sector have once again brought the finalisation of the banking union to the forefront of the debate in Brussels.

On 25 February the Commission launched a consultation on crisis management and deposit insurance that remains open until 21 May. The consultation focusses on stakeholders’ experience with the Bank Recovery and Resolution Directive (BRRD), the Single Resolution Mechanism Regulation (SRMR) as well as the veteran Deposit Guarantee Schemes Directive (DGSD).

Behind the drive described above lie a number of issues that the European Commission would like to be addressed including a.o.:

  • Changes to the resolution framework: A number of mid-sized failing banks in Member States like a.o. Italy or Portugal have shown the limits of the BRRD and its scope. The Commission intends to work on a more inclusive resolution regime beyond the systemic banks only. That process could also include elements like the application of public interest assessment, liquidation procedures or interaction with EU state aid rules.
  • Adoption of the common deposit insurance scheme: The Commission’s EDIS proposal has been on the table for 6 years now with an ongoing debate often framed as risk reduction versus risk sharing. The Commission through the voice of its financial services chief Mairead McGuinness has confirmed that its ambition is still to ultimately arrive at a loss sharing mechanism although that might have to pass through a simple liquidity guarantee phase first.
  • Modification of the regulatory treatment of sovereign exposures: Currently the latter is the same among Member States and basically risk free. The so-called eurozone crisis a few years ago made the theoretical nature of that assumption obvious. The issue is politically sensitive with one group of Member States emphasising the need to break the potentially dangerous bank-sovereign loop while another group stressing that such a move would risk destabilising their own funding.
  • Home-host and cross border integration of EU banks: Where parent companies seek a reduction of capital costs via waivers, host Member States are concerned about a lack of substance and own funds in the subsidiary. The latter issue has a.o. impacts on financial stability, depositor and investor protection, competition between subsidiaries and local banks as well as economic and social consequences.

Looking ahead milestones in this journey will be the scheduled June Eurogroup summit which is expected to deliver the Member States’ work plan as well as the legislative package the Commission announced by the end of the year.

By Antoine Kremer and Gilles Pierre

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