According to the Commission's proposal, in the first phase this calculation will remain unchanged but, as from the second phase, the benchmark to compare risk profiles will be all banks in the euro area.
The banks of a country whose risk profile is lower than the euro area average would therefore have to contribute less to the EDIS. The effect of this methodological change can only be quantified once more details have been announced. In summary, this proposal by the European Commission is a step in the right direction but there is still room for improvement in some aspects, such as the harmonisation of national DGSs and specifying the method that will be used to calculate risk-weighted contributions to the fund.
Negotiations will be long and controversial but this is a necessary step for us to approach full banking union. Sign up. About CaixaBank Research. Sector analysis. January 8th, European governance. A group of countries forms an optimal currency area when the use of a single currency does not result in any loss of well being Mundell, Two criteria for a successful currency area are the homogeneity of shocks experienced by its member countries and the mobility of production factors.
The architects of the European Economic and Monetary Union undoubtedly hoped that the emergence of a single currency would create the conditions for an optimal currency area by encouraging labour mobility and by reducing the specialisation of national economies Frankel and Rose, Yet the theory of the endogeneity of OCA criteria had already been called into question Krugman, 3.
In the absence of perfect economic and financial integration between member countries, a monetary union creates externalities that require transfers between member countries during severe circumstances, such as asymmetric shocks, in order to offset the fact that they can no longer adjust exchange rates. Literature on optimal currency areas often point out the substitutability of fiscal transfers and risk sharing via more integrated financial markets. In the absence of sufficient financial integration, fiscal transfers help reduce cyclical differentials.
In this case, fiscal federalism is the best response, because it allows for the implementation of effective insurance mechanisms. In the unfolding of the recent crisis, asymmetric shocks arose at times from the impact of banking crises on public finances, as in Ireland see chart 1 , and at other times from the impact of public finances on the banking system i. As a result, the troubles of the banking and public spheres were mutually sustained, while responsibility for financial stability was still largely national.
This point is illustrated by the national correlation between the cost of bank resources and the widening of government bond spreads relative to the Bund see charts 2 a and 2 b. The shocks of summer the dollar- denominated financing shock that hit the big European banks and the sovereign debt crisis led to the segmentation of banking systems within the eurozone. The repatriation of capital within national borders reduced the degree of integration of government bond markets, interbank markets and deposits, which had been increasing constantly since the start-up of the euro.
Although the theory of optimal currency areas does not explicitly refer to banking union, some authors explored the question of the role of a single central bank as lender of last resort for member states De Grauwe, and commercial banks Goodhart, , which was sometimes qualified as a banking union.
The ECB finally agreed to play the role of lender of last resort for ailing states, but its emergency action must be seen as a temporary means of easing liquidity constraints and to help the eurozone set out on the path to greater fiscal integration. European banking union is seen differently. First, it represents an intermediate response between financial integration and fiscal federalism.
It aims to strengthen the integration of banking systems by harmonising the rules that govern them single rulebook, single supervisory mechanism, resolution plans. It introduces a dose of fiscal federalism by mutualising some of the cost of banking crises, after taking into account national.
This form of banking union seems to be more ambitious and potentially less dangerous than an overly explicit role of lender of last resort bestowed on the central bank. Since its creation, European monetary union has suffered from the lack of genuine fiscal federalism. Monetary policy cannot be truly autonomous as long as public finances are direct tributaries of the troubles of the banking system.
Of course, if the house is burning, the ECB can put out the fire, but its action risks interfering with its monetary policy objectives. Consequently, it seems immensely preferable to have a supra-national policeman with a preventative mission. In the midst of a financial crisis, it is essential to restore confidence in the mechanisms for risk supervision, prevention and the handing of banking crises.
It is for this purpose that the Commission adopted a set of proposals on 12 September aiming to implement a banking union. Dangerous liaisons: Banks and public finances monthly data, The remedial section implies greater European solidarity, something which will only be politically acceptable if the preventative section is considered credible.
Banking union therefore has an overarching logic and forms an inseparable whole. In practice, the introduction at the end of of CRD 3 Basel 2. It is currently in. Bank supervision traditionally aims to prevent systemic risk within the banking sector and to improve transparency and depositor protection. The traditional argument for centralised supervision lies in the difficulty of reconciling a single financial market and financial stability with decentralised supervision conducted by national authorities through a triangle of incompatibilities Schoenmaker , Thygesen 10 cf.
Greater proximity between the supervised entity and their local supervisors makes the latter less vigilant Rajan and Zingales, Moreover, eventual political pressures on banks could lead to a less efficient allocation of credit Becker Between the birth of the euro and the outbreak of the financial crisis, the development of cross-border interbank operations has increased the integration of financial and banking markets see chart 3.
This growing integration has helped improve the transmission of the single monetary policy. But at the same time, the threats that banking troubles have created for the stability of the region as a whole justify the centralisation of supervisory functions with a single authority, rather than leaving them in the hands of national authorities.
Since the ECB is the only European institution not directly subject to political power, it seems only natural that it would be attributed this mission. Payment Financial support systems Interventions. System Non-standard mon. The argument for combining monetary policy and supervisory responsibility within the central bank stems from the natural role that it has in ensuring financial stability.
In contrast, the mission conferred on the National Bank of Austria is derived from a simple ministerial statement. As to bank supervision, twelve of the 27 central banks in the eurozone have already been given this responsibility.
The five other supervisory institutions are either autonomous or semi-autonomous France, Germany, Luxembourg, Finland and Estonia 11 In the United Kingdom, it is worth noting that the Financial Services Authority FSA , harshly criticised for its management of the failure of Northern Rock, was partially reintegrated in the Bank of England recently.
Bank failure presents a contagion risk that a central bank would be hard pressed to avoid in order to. To distinguish these from cases of bank insolvency, it is necessary to maintain a level of expertise and analyse the quality of counterparties before lending to them, giving clear legitimacy to a supervisory role.
Lastly, there is a close link between macro-prudential and micro-prudential supervision: the exploitation of individual information provides a better appreciation of micro-financial risk.
Conversely, there may be conflicts of interest between the conduct of monetary policy and of supervisory roles. One example is an increase in interest rates that would help ensure price stability but which could result in the failure of one or more of the banks under supervision. That said, for most of the central banks given responsibility for supervision, the staff in charge of these functions is attached to a distinct structural entity that is physically separated from other services.
President qualified independent individual. Vice-president named from among the Executive Board members. This interpretation was not accepted unanimously 13 President Van Rompuy 14 considers that in their current state, the treaties authorise a strengthening of the Economic and Monetary Union and, assuming any changes were necessary, they would have to wait until after the European elections planned in The ECB will have exclusive competence to carry out key supervision functions aimed at identifying risks and forcing banks to correct them.
In particular the ECB will be responsible for approving lending establishments, ensuring that capital requirements are met and adapting these requirements, as necessary, to the risk profile of the institution pillar 2.
It will conduct supervision of financial conglomerates on a consolidated basis and may conduct its investigations within them. As with the ESCB in monetary policy, the single supervisory mechanism will consist at creation of the ECB and the central banks of the eurozone member countries, with the ECB maintaining final responsibility.
National authorities will retain their prerogatives for tasks that do not relate to financial stability: consumer protection, combating money laundering and also the supervision of credit institutions from third countries which have branches or provide cross-border services within a member state. EU member states which have not adopted the euro could nevertheless take part in the single supervisory mechanism by cooperating with the ECB.
Lastly, the European Banking Authority will retain its current role but will exercise its powers and missions for the ECB. In particular it will continue to develop the single rulebook and will also become the standard bearer for supervision practices within the European Union, i. It was with this in mind that on 12 September the European Commission adopted, at the same time as its. One argument put forward in favour of restricting the scope of supervision to establishments of systemic importance is that the central supervisor will only have a real information advantage over national supervisors in the case of institutions that are active across several member states.
On the contrary, European experience tends to suggest that small and mid-sized banks are frequently sources of financial instability, particularly due to the strong correlation of risks between them as with the Cajas.
The agreement between the Heads of State and Government on 13 and 14 December makes it probable that the final text on the single supervisory mechanism will be adopted in April Independently of this size criterion, SSM will cover at least three banks per country.
Smaller banks will continue to be supervised by their national supervisory authorities, although they could be placed under direct ECB supervision if their situation were to deteriorate to the point of threatening financial stability. The single supervisory mechanism will not be operational before 1 March , a technical delay required by the ECB. Single oversight is a prerequisite for direct recapitalisation of banks by the European Stability Mechanism.
Members states in financial difficulty complying with a principle of conditionality can receive direct loans, primary market support, secondary market support, or precautionary financial assistance through back-up credit lines in case of troubles accessing the market. For requesting member states, the recapitalisation programmes aim to provide lower cost financing via ESM to recapitalise their banking systems.
The advantage of direct recapitalisation see above is that it skirts the precondition that a member state request financial assistance, which it might be reticent to do, and allows for the necessary action to be taken to prevent the crisis from spreading within the banking sector. Another direct consequence for European banks placed within the scope of the single supervisory mechanism is that oversight of pillar 2 requirements would no longer be the responsibility of national supervisors ACP in France, BaFin in Germany but solely of the ECB.
Bank deposits have been covered by a harmonised guarantee across all EU member states of EUR, per depositor since 1 December National structures benefit from at least an implicit government guarantee. However, in the event of a severe crisis, fiscal room to manoeuvre could be considered too limited to create a credible guarantee for depositors, thus leading to bank runs and hence to a weakening of the banking system and governments.
It therefore seems fairly undesirable to maintain public deposit guarantee schemes within a strictly national framework. The European Commission proposed to go further by adopting on 12 July a Directive of the European Parliament and of the Council 17 that aims to harmonise and simplify the definition of deposit guarantees by reducing the time limit for paying out depositors.
The proposal adopted by the European Commission calls for the modification of deposit guarantee systems, notably be setting up ex-ante funding, via a contribution from banks set according to their risk profile according to a method established by the EBA, and a restrictive common borrowing facility for national deposit guarantee schemes. National funds that run out of resources would be authorised to borrow from other funds according to a kind of national franchise.
After several amendments, the text was adopted by the European Parliament on 16 February The legislative proposal adopted by the Commission on 6 June see below establishing a framework for bank resolution see below makes it possible to combine deposit guarantee and bank resolution mechanisms within the same fund.
This text, which is currently pending first reading by Parliament, arrives just in time to restart talks on deposit reform, raising hopes that a definitive vote could take place during , even though there is bound to be a bitter debate over the degree of fiscal equalisation.
The Commission could use this mechanism to present the next step towards banking union: a single bank resolution mechanism structured around a single bank recovery and resolution authority.
The final pillar of banking union proposed by the Commission is a single orderly liquidation mechanism that would set the rules for bank resolution and allow the coordinated application of resolution instruments to non- viable failing banks within the banking union. One of the vital parts of this roadmap was the creation of a more integrated financial framework, i. Agreement on the SSM. Operational since November , the SSM has been placed within the ECB and is responsible for the direct supervision of the largest and most significant banking groups, while national supervisors continue to supervise all other banks, under the ultimate responsibility of the ECB.
In line with the development of these criteria, the actual number of banks directly supervised by the ECB changes over time; the ECB can moreover decide at any time to classify a bank as significant if that is necessary to ensure that high supervisory standards are consistently applied.
Comprehensive Assessment. The results, published in October , showed that 25 out of participating banks had capital shortfalls.
The main objective of the SRM is to ensure that bank failures in the Banking Union are managed efficiently, with minimal costs to taxpayers and the real economy. In the event that action is needed, a central authority — the Single Resolution Board SRB — will take charge of the decision to initiate the resolution of a bank, while from an operational point of view, the decision will be implemented in cooperation with national resolution authorities.
The contributions to the SRF are paid in by the banks over the course of eight years. Taking into account the current annual growth in covered deposits, the fund will end up at close to EUR 70 billion. The new rules for burden-sharing that are applicable in the case of bank resolutions are set out in the Bank Recovery and Resolution Directive BRRD , adopted by Parliament in April The BRRD provides for ways in which ailing banks can be resolved without requiring taxpayer bailouts, implementing the principle that losses have to be borne first by shareholders and creditors, rather than through recourse to state funds.
Legislative procedures to amend the BRRD, in particular in order to incorporate international standards on loss-absorbing and recapitalisation capacities, were adopted by Parliament in April see point G. Minimum capital requirements define how much capital a bank must hold to be considered safe to operate and able to deal with operational losses on its own.
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