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Banking Union

Banking Union

Context

In response to the EU sovereign debt crisis (2011-2012), the European Union created the Banking Union to safeguard financial stability, deliver a safer banking sector and protect taxpayers from the cost of bank failures. The banking union, currently covering 19 eurozone countries, is also open to other EU Member States.

Europe’s competitiveness and growth need competitive banks. A genuine banking union would ultimately foster a more effective allocation of resources across the Eurozone and improve risk diversification, while supporting the development of cross-border banking groups and extend private risk sharing.

The conception of the Banking Union relied on three pillars: supervision, resolution, and the management of Deposit Guarantee Schemes (DGSs), which remain under discussion among Member States.

The first pillar is the Single Supervisory Mechanism (SSM), created in 2014, comprising the ECB and national authorities, directly supervising the most significant banks of the euro area.
The second pillar is the Single Resolution Mechanism (SRM), established in 2016, which provides a common framework for managing failing banks and limiting recourse to taxpayers, and is reinforced by the recent completion of the Crisis Management and Deposit Insurance (CMDI) framework in March 2026.

The third pillar is a European framework for deposit guarantee schemes (DGSs), which would be funded entirely by banks and aim to preserve taxpayers in the event of bank failures. No agreement has yet been reached on a fully-fledged European Deposit Insurance Scheme (EDIS).

The Covid-19 crisis and the banking turmoil of Spring 2023 have shown that the Banking Union contributes to a more resilient European banking sector. But ten years after its creation, it remains incomplete, and its main objectives – breaking the sovereign-bank loop and creating a genuinely integrated single market for banks – have not been achieved.

Despite the creation of European supervision and resolution authorities, the banking sector in Europe remains fragmented due to differing national legal frameworks and supervisory demands, leading to sub-optimal capital and liquidity allocation within cross-border groups, lowering their profitability. The “national bias” continues to fragment the banking market along national lines: thought there are no host supervisors anymore, the distinction between home and host authorities still exists for banks operating across borders under the SSM’s remit, thereby perpetuating ring-fencing practices.

This is a source of risk, as the banking sector does not act as a shock absorber across countries. Moreover, banks cannot create truly pan-eurozone business due to a patchwork of national rules.

These issues still need to be addressed by EU regulators and supervisors to reduce fragmentation and improve the functioning of cross-border banking activity.

Eurofi documents

Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)

Regulatory Update

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Summary

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Views The Eurofi Magazine

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Key contributions

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