In response to the financial crisis that emerged in 2008, the European Commission pursued a number of initiatives to create a safer and sounder financial sector for the single market. These initiatives, which include stronger prudential requirements for banks, improved depositor protection and rules for managing failing banks, form a single rulebook for all financial actors in the 28 Member States of the European Union. The single rule book is the foundation on which the Banking Union sits.
As the financial crisis evolved and turned into the Eurozone debt crisis, it became clear that, for those countries which shared the euro and were even more interdependent, a deeper integration of the banking system was needed. That’s why, on the basis of the European Commission roadmap for the creation of the Banking Union, the EU institutions agreed to establish a Single Supervisory Mechanism and a Single Resolution Mechanism for banks. Banking Union applies to countries in the euro-area. Non-euro-area countries can also join.
As a further step to a fully-fledged Banking Union, in November 2015, the Commission put forward a proposal for a European Deposit Insurance Scheme (EDIS), which would provide a stronger and more uniform degree of insurance cover for all retail depositors in the banking union.
- Understanding Banking Union (Finance Newsletter, 27.02.2015)
- Banking Union : Restoring financial stability in the Eurozone (24.11.2015)
- Communication from the Commission: a Roadmap towards a Banking Union (September 2012)
The Single Supervisory Mechanism (SSM) places the European Central Bank (ECB) as the central prudential supervisor of financial institutions in the euro area (including approximately 6000 banks) and in those non-euro EU countries that choose to join the SSM. The ECB directly supervises the largest banks, while the national supervisors continue to monitor the remaining banks. The main task of the ECB and the national supervisors, working closely together within an integrated system, is to check that banks comply with the EU banking rules and to tackle problems early on.
The Single Resolution Mechanism (SRM) applies to banks covered by the SSM. In the cases when banks fail despite stronger supervision, the mechanism will allow bank resolution to be managed effectively through a Single Resolution Board and a Single Resolution Fund, financed by the banking sector.
Its purpose is to ensure an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy.
European Deposit Insurance Scheme
The European Deposit Insurance Scheme (EDIS) would apply to deposits below 100.000 euros of all banks in the euro area. When a bank is placed into insolvency or in resolution and it is necessary to pay out deposits or to finance their transfer to another bank, the national deposit guarantee schemes and EDIS will intervene. At the final stage of the EDIS set up, the protection of those deposits will be fully financed by EDIS, supported by a close cooperation between EDIS and national DGS.
Given that national DGS may remain vulnerable to large local shocks, the purpose of EDIS is to ensure equal protection of deposits through the Banking Union regardless of the Member State where the deposit is located.
The single rulebook is the foundation of the banking union. It consists of a set of legislative texts that all financial institutions (including approximately 8300 banks) in the EU must comply with. These rules, among other things, lay down capital requirements for banks, ensure better protection for depositors, and regulate the prevention and management of bank failures.