The European Union last month made progress in its aspirations to create a single banking union for members of the eurozone.
The recent financial crisis proved that the effects of failing banks can quickly cross borders, highlighting the need for a single authority among eurozone members to supervise the banking system as well as deal with failing banks. On September 12, further powers were conceded to the European Central Bank, which will now oversee 6,000 banks in the 17 eurozone countries, effective as of September 2014.
This action provides the legal framework for the ECB to oversee all banks forming part of the currency bloc and also those that will join in the future.
Moreover, the ECB will supervise the loan books of these banks, another measure taken to boost trust in Europe’s financial and banking systems.
The financial crisis made it evident that greater regulation in the banking and financial sectors is necessary to promote economic stability and growth within the EU.
Likewise, the eurozone debt crisis highlighted the relationship between sovereigns and banks, for European banks held substantial numbers of government debt securities distributed in large part by eurozone sovereigns. In order to break this unhealthy cycle, a centralised regulatory body is necessary to streamline the delivery of rules to European banks. Therefore, in 2012, EU leaders committed to the formation of a banking union, which was further outlined by the Commission’s blueprint for the European Economic and Monetary Union for the next decade.
The blueprint highlights three legs in the creation of a banking union: a single bank supervisor (the ECB), a single resolution authority and a single deposit guarantee scheme. Furthermore, the banking union will promote deeper integration of the eurozone countries.
There are disagreements on how much power the ECB will have with regard to shutting down a ‘bad’ bank. Leaving the decision-making process up to national authorities when discussing a failing bank would create unnecessary tension between member states and the ECB.
Confidence needs to be continually restored in the European Union to boost financial markets
Therefore, in order to complement the single supervisory mechanism, the Commission proposed a single banking resolution authority (SRA), fulfilling the second leg of the process towards forming a European banking union. This authority would comprise of a permanent chairperson, representatives from the Commission and the ECB and representatives of the member states that are directly affected by the failing bank.
The SRA will be able to advise the Commission on the future of bad banks but the Commission will make the final call, leaving member states without any veto power.
Commission president José Manuel Barroso states that this single resolution mechanism will “put the financial sector on a sounder footing, restore confidence and overcome fragmentation in financial markets”.
According to the Commission’s timeline, the SRA should be functioning by 2015.
The series of bank bailouts during the financial crisis were widely unpopular as the burden continuously fell on taxpayers and cost the EU one third of its economic output between 2008 and 2011. In order to ease the taxpayer burden and prevent such an occurrence from happening again, the supervision of banks as well as agreement on the future of failing banks must be handled at EU-level.
However, Germany has continuously shown signs of hesitation regarding a single banking union, especially in terms of a single resolution mechanism to handle failing banks. As the member state with the most powerful economy, Germany is fearful that it will bear the brunt of bills resulting from bank bailouts in other countries.
Nonetheless, an agreement needs to be reached quickly for any delay may cause the issue to be postponed until after the May 2014 elections and time is of the essence because confidence needs to be continually restored in the European Single Market to boost financial markets.
Prior to the spread of the financial crisis to Europe in 2008, each member Sate had differing rules and regulatory systems for banks, causing a problem when bank failures had cross-border effects and countries needed to coordinate a response.
As the EU moves forward and works to prevent another crisis from occurring, a banking union is key to centralising regulation and upholding the economic and monetary union for years to come.
David Casa is a Nationalist MEP.