European Commission communication on completing the Banking Union

On 11 October 2017 The European Commission issued a communication on completing the Banking Union. The complete Banking Union should together with the Capital Markets Union (CMU) promote a stable and integrated financial system in the European Union and increase the resilience of the Economic and Monetary Union. The crises revealed the existence of undesirable links between national banking sectors and their sovereigns – the so-called doom loop. The Banking Union was created to break that link and avoid that taxpayers are first in line to bail out ailing banks. The Commission welcomes the discussions in Denmark, Sweden and Bulgaria about the possibility to join the Banking Union.

Several key elements of the Banking Union are already established:

• Single Rulebook – single set of harmonised prudential rules
• Single Supervisory Mechanism (SSM). the most significant banks in the euro area being centrally supervised by the European Central Bank (ECB)
• in the case of failure, banks can be resolved centrally and according to the same standards within the Single Resolution Mechanism (SRM), which is backed by a Single Resolution Fund (SRF).

However, Single European Deposit Insurance Scheme (EDIS) remains one of the missing pieces. All depositors within Banking Union should enjoy the same level of protection.

The Banking Union also still lacks an effective, common backstop. This would include, for example, using common funding in combination with the European Central Bank instruments to cover liquidity shortfalls and have more time to look for the best buyer of a bank in a specific situation. One of the challenges that remain is to decisively continue the recent trend of reducing the high levels of non-performing loans (NPLs) in parts of the banking sector. Commission will reduce the level of NPLs via further loosening of the interconnection between banks and their “home country”. The Commission will issue in December 2017 a comprehensive package of measures to strengthen Economic and Monetary Union.

The Commission will consider putting forward a legislative proposal for an enabling framework for the development of sovereign bond-backed securities in early 2018. By pooling and possibly tranching sovereign bonds from different Member States, Sovereign Bond-Backed Securities could support further portfolio diversification in the banking sector, while creating a new source of high-quality collateral particularly suited for use in cross-border financial transactions.  

15-12-2017