Since the inception of an Economic and Monetary Union, the need was felt for stronger mechanisms at EU level aimed at enhancing market integration in the banking sector.
In the midst of the debt crisis that hit the banking sector in certain EU countries post-2008, the concept of a banking union started to take shape.
In a bid to formulate a policy response to the fragility of banks in the eurozone at that time, the EU member states agreed to create a banking union to complement the economic and monetary union. This translated into a mechanism permitting centralised application of rules for banks in the euro area at EU level.
The European Banking Union is an integrated financial framework to safeguard financial stability and minimise the costs of bank failures. The new regulatory framework with common rules for banks in all 28 member states, set out in a single rulebook, is the foundation of the banking union. The EU’s ‘single rulebook’ is achieved through three main initiatives, the first in the form of supervision at EU level, the second managing failing banks, and the third in the form of improved depositor protection.
The EU institutions agreed to establish a Single Supervisory Mechanism (SSM). The SSM became formally operational yesterday. The key element of the SSM is the granting to the European Central Bank (ECB) of a prudential supervisory role of all the banks in the eurozone in the framework of the SSM.
With respect to less significant banks, the ECB will be responsible for the monitoring of the supervision carried out by national competent authorities, including the power to take over supervisory functions in order to ensure consistent application of high supervisory standards. In relation to the largest eurozone banks, there will be a transfer of responsibility for banking policy from the national to the EU level. In addition to this role, the ECB has been granted wide investigatory powers including the power to request information, conduct general investigations, and perform on-site inspections, as well as executive powers, including the authority to impose administrative penalties and revoke licences to carry out the banking business.
Pursuant to the SSM Regulations of 2014, there are some 130 significant credit institutions that are currently indicated as falling under the ECB’s direct supervisory powers. These credit institutions represent almost 85 per cent of the total banking assets in the eurozone. Less significant credit institutions will continue to be supervised by the national competent authorities under the overall oversight of the ECB.
In Malta, the Bank of Valletta plc, Deutsche Bank (Malta) Ltd and HSBC Bank Malta plc were designated as significant on the basis of their total assets, which exceed 20 per cent of the GDP and consequently are regulated under the ECB’s direct supervision.
In addition to the SSM, a Single Resolution Mechanism (SRM) for banks was also put into place.
If banks end up in financial difficulty notwithstanding the strong supervision implemented, the SRM sets out a common framework to manage the process more efficiently through a Single Resolution Board and a Single Resolution Fund. If the financial situation of a bank were to deteriorate beyond repair, banks’ shareholders and creditors would have to pay their share of the costs through a “bail-in” mechanism rather than through bailouts paid for by taxpayers.
By virtue of the Directive on Deposit Guarantee Schemes, common rules also ensure that all deposits held by individuals and enterprises are guaranteed up to €100,000 (per depositor/ per bank) at all times and everywhere in the EU even if a bank fails, irrespective of the currency in which the deposits are held.
Currently, depositors must be able to access their funds within 20 working days after a bank failure. Repayment deadlines will be gradually reduced from 20 working days to seven working days in 2024.
Interest will now be taken into account when reimbursing deposits and loans cannot be deducted any more from the amount to be reimbursed.
The completed banking union is a big step in the economic and monetary integration of the EU. This, in turn, creates the right conditions for financial stability and economic recovery.
jgrech@demarcoassociates.com
Josette Grech is the adviser on EU law at Guido de Marco & Associates.