In his State of the Union address in September, European Commission President Jean-Claude Juncker emphasized the importance of completing the banking union as a matter of urgency and encouraged all Member States to join. ''We need to reduce the remaining risks in the banking systems of some of our Member States,'' he said. ''Banking union can only function if risk-reduction and risk-sharing go hand in hand.''

A more stable and integrated banking sector

On 11 October, the Commission published a communication to steer the political discussion with the view of completing the Banking Union by 2019, the end of this Commission's mandate. Overall, the Banking Union is working well. A set of prudential rules, known as the single rulebook, are applicable throughout the EU.  Europe also has a single supervisor, the Single Supervisory Mechanism (SSM), which gives the European Central Bank certain supervisory powers over the EU financial system. And the Single Resolution Mechanism (SRM) resolves failing banks centrally and according to the same standards, with the financial support of the Single Resolution Fund (SRF) when needed. The Banking Union, with the SSM and SRB/SRF at its heart, currently unites all Member States who share the euro but is open to all Member States that want to join.

But there are a number of areas where further steps are necessary.

In November 2016, the Commission put forward a package of proposals to reduce risks and strengthen the resilience of EU banks. The communication highlights the need to move forward with these reforms which are awaiting adoption by the European Parliament and the Council (i.e. Member States).

The communication also stresses the importance of creating a so-called common fiscal backstop for the SRF – in other words a mechanism, the resources of which could be used in cases where the SRF is not enough to deal with a bank failure. A backstop would reinforce the overall credibility of EU bank resolution rules by ensuring that the SRF has enough resources to deal with a major bank resolution, or even several bank resolutions occurring in rapid succession. The communication calls for work on a credit line from the European Stability Mechanism (ESM) to be finalised as soon as possible and no later than 2018.

Furthermore, the communication considers the possibility of putting forward an enabling framework for the development of sovereign bond-backed securities. These would be a new type of asset traded on the market and created by pooling and possibly tranching government bonds. This is in line with one of the objectives of the Banking Union, which is to reduce financial stability risks by making it easier for banks to geographically diversify their holdings of sovereign bonds.

EDIS

The Banking Union has three basic elements as its foundation: bank supervision; the management of failing banks; and protection for depositors. The first two have been largely achieved in the SSM and the SRM. However, a common European deposit insurance scheme (EDIS) is still missing. EDIS was proposed by the Commission in 2015 to make sure that all depositors within the Banking Union benefit from the same level of protection regardless of where they are geographically located.

In order to take into consideration a number of concerns voiced by the European Parliament and Council, the communication sets out a number of ideas to try and unlock the negotiations and get the EDIS proposal adopted quickly. One idea is that EDIS would be introduced gradually and in two phases: reinsurance and coinsurance. In the reinsurance phase EDIS would only provide liquidity coverage to national deposit guarantee schemes (mostly needed to repay depositors in case of a failing bank), while in the coinsurance phase it would also cover losses. Moving to the second phase would depend on progress achieved in reducing the level of non-performing loans and Level 3 assets (as assessed through an asset quality review) to further increase the health of the banking sector. Level 3 assets are assets which are typically very illiquid, and their valuation cannot be determined by using observable measures such as market prices or models. These ideas should help to advance the original Commission's proposal that still remains on the table of the co-legislators.

Non-performing loans

The communication also addresses the problem of non-performing loans, or NPLs, which continue to be problematic for some banks. NPLs not only impede banks' competitiveness, but they also limit their ability to lend to the economy. While the responsibility for tackling NPLs falls primarily to the affected banks or Member States, there is nonetheless a European dimension. This is because weak growth in certain countries due to high levels of NPLs can affect economic growth elsewhere in the EU.

The Commission is currently working on proposals that would help enable banks and supervisors to manage existing NPLs and avoid them being created in the future. It plans to adopt a package of measures by spring 2018. Among other things, these will include a blueprint for setting up national asset management companies as well as legislative measures to develop secondary markets for NPLs and enhance the ability of creditors to recover value from secured loans.

Vice-President for Financial Stability, Financial Services and Capital Markets Union Valdis Dombrovskis, speaking in Brussels at the publication of the communication, underlined the importance of a strong Banking Union for the future of the Economic and Monetary Union and a financial system that supports jobs and growth. ''We want a banking sector able to cope with future risks and to deliver benefits to all European citizens," he said.

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