Finance: Research, Policy and Anecdotes

Completing the banking union

I have written extensively about the banking union (e.g., here and here) and about the need to complete it. Originally framing its incompleteness as glass half-full vs. glass half-empty, it has become clear that the political appetite for completing the banking union is not there.  Nevertheless, in a recent Policy Insight and as part of a larger group of economists and legal scholars, I argue that the banking union has not really achieved its objectives and make a strong case for further reform, offering a menu of three different approaches.

 

One can identify three objectives of the post-2008 regulatory reform, including the banking union: (i) sever the vicious link between bank and sovereign fragility, (ii) restore private liability in banking and thus avoid future bailouts, and (iii) reinforce the basis for a European single market in banking services. If one considers the last few years, these objectives have not really been achieved.

 

Institutionally, some progress has been made: the Single Supervisory Mechanism (SSM) has been established, shifting the supervision of the largest banks in the euro area (80% of assets) to a large extent to the supranational level. But while a Single Resolution Mechanism has been established, resolution authorities are still fragmented: resolution decisions taken by the Single Resolution Board may need the consent of other authorities, including the European Commission’s DG Competition and the Council of the EU. At the implementation stage, input from national resolution authorities is needed. There has been no progress on a supranational deposit insurance.

 

The result: the supranational resolution framework has been barely applied, with most cases being resolved at the national level and with taxpayer support. The sovereign-bank link has not been addressed at all and more generally, national political interests still seem to dominate regulatory and supervisory decisions.

 

In our Policy Insight, we provide three ways forward, which we name the ‘incremental deal’, the ‘real deal’ and the ‘cosmic deal’.  The ‘incremental deal’ is the politically least sensitive package of reforms, including extension of resolution tools to mid-sized and smaller banks, tighten state aid rules and provide more powers to the SRB. None of the proposals requires treaty change, although most would require changes in secondary law.

 

The ‘real deal’ goes a step further and aims at a more comprehensive reform, including addressing the sovereign-bank link by introducing sovereign concentration charges. Further, bank resolution and crisis management powers should be consolidated under the SRB and a common fiscal backstop created. Finally, a European deposit insurance is needed that complements existing national or industry-based schemes. New secondary legislation would obviously be needed to implement these proposals. In our analysis, a treaty change is not required, but may be desirable, given the uncertainty about the Meroni doctrine, which restricts the exercise of discretionary powers by a European agency (e.g., SRB) not originally established in the founding treaties. Whether such a reform is politically feasible or might have to wait until the next financial crisis is a different question.

 

Completing the banking union is a necessary but not sufficient condition to create a truly single market in banking, in which national banking champions are replaced by European large banks, while smaller, regionally, if not locally focused, financial institutions are maintained. For such a single market to emerge, further conditions would have to be met in what we refer to as ‘cosmic deal’, including: (i) a single system of bank taxation, (ii) a single system for corporate and personal insolvency and (iii) a single framework for housing finance and mortgages.  Such harmonisation would enable easy cross-border provision of financial services within the euro area.  While radical, these reforms may not require treaty change. The EU can harmonise tax laws under TFEU Article 114 insofar as this serves “the establishment and functioning of the internal market”, though treaty change may be prudent, to avoid overstretching Article 114.

 

In addition to the policy insight, this VoxEU column summarises our analysis and views.