State of the Banking Union State of the Banking Union

The success of the Single Supervisory Mechanism (SSM) has given the EU's planned Banking Union (BU) a strong start. The SSM has earned a robust reputation, and continues to evolve. In contrast, the Single Resolution Mechanism (SRM) has struggled to achieve harmonisation. Hopefully, 2018 will see Member States refocusing on the huge potential benefits of BU and giving the SRM their full support.

The Banking Union (BU) is one of Europe's most important projects. It has the potential to generate a number of profound benefits across the Union, including:

• A strong, trusted banking system;
• The prevention of future bail-outs;
  
• A harmonised, integrated banking industry that supports the Single Market; and
  
• The ability for banks to realise pan-European synergies and efficiencies in times of disruption.
  

The BU is given additional importance by European non-financial companies' high level of reliance on bank financing in comparison to markets such as the USA, where capital markets financing is more commonplace. In the long term, the BU also represents a vital stepping stone towards the goal of achieving an EU Capital Markets Union.

The last few months of 2017 have seen a renewed effort by European policymakers to advance and strengthen this vital project. So this seems like a good moment to ask: How healthy is the BU?

The answer depends on which of the three pillars of the BU we look at.

On the plus side, the Single Supervisory Mechanism (SSM) has exceeded the expectations of many since its inception three years ago. It is now well-established, and enjoys national and international credibility as a tough but fair supervisory regime.

Of course, the SSM remains a `work in progress'. For example, the EBA would like to see greater convergence in areas like options and discretions. Europe's persistent overhang of non-performing loans (NPL) has also compelled the European Commission to launch an NPL Action Plan. But overall, the first pillar of the BU is working well and - as illustrated by the SREP's evolution (see our article) - continues to adapt and improve with experience.

In contrast, the evolution of the BU's second pillar, the Single Resolution Mechanism (SRM) is in an earlier state of maturity given its later start. The principles and framework of the SRM have been established in European law, via the Bank Recovery and Resolution Directive (BRRD) and the Single Resolution Mechanism Regulation (SRMR) which were also amended recently. But the SRM itself remains very much in `start up mode'.

This is partly about resourcing; the SRB has fewer than 200 full-time employees, while the ECB boasts more than 1,000 supervisory staff. But the SRM's slow progress also reflects a lack of support from Member States. As a result, progress on the resolvability of banks, their resolution plans and the definition of bail-in liabilities has been comparatively limited. This lack of harmonisation means that more banks are currently being resolved via national mechanisms than under the terms of the BRRD.

And what about the third BU pillar, the European Deposit Insurance Scheme (EDIS)? To date, this has barely advanced beyond a proposal. The Commission's plans allow for a phased implementation over several years, but for now the EDIS remains the subject of political debate rather than concrete planning. Further progress on this pillar of BU seems unlikely while the second pillar has yet to establish full credibility. In addition, certain member states are re-iterating that further risk reduction in the European banking system is a prerequisite for any pan-European risk sharing by means of a joint deposit insurance scheme.

We should perhaps not be too surprised by the unbalanced state of the BU's health. The SSM represents one of the EU's most remarkable achievements, but it is a less politically sensitive proposition than the SRM or EDIS, which both involve the mutualisation of risk between Member States.

Nonetheless, we should remember the significant benefits that the BU could deliver for European citizens. Like a stool, the BU needs each of its three legs to be strong if it is to work as it should. If the upsides of the BU are to be realised, Member States need to build on the success of the SSM and increase the credibility of the SRM over the next years by making a high standard of resolution preparedness a prerequisite for EDIS.