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Beyond the Pandemic: Reviving Europe’s Banking Union

Summary:
This report reviews Europe's banking union and suggests possible regulatory changes to revive the project, focused on three strategic goals: reducing overbanking, especially among the weaker players; favouring consolidation and efficiency among the stronger ones; and strengthening balance sheets further, while encouraging cross-border diversification. PDF Download In 2012, at the peak of the euro crisis, the European Union launched the banking union, a project involving the transfer of large parts of the bank regulatory and supervisory framework from the national domain to the euro area. Its aim was to reinforce the euro architecture and to strengthen the area’s banking industry, both put to a severe

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Beyond the Pandemic: Reviving Europe’s Banking Union

PDF Download

In 2012, at the peak of the euro crisis, the European Union launched the banking union, a project involving the transfer of large parts of the bank regulatory and supervisory framework from the national domain to the euro area. Its aim was to reinforce the euro architecture and to strengthen the area’s banking industry, both put to a severe test by the crisis. The project led to the creation of a supervisory function in the European Central Bank (ECB) and of a new area-wide resolution authority, the Single Resolution Board (SRB).

Today, although the euro area banks are better capitalised and more robust, the central objectives of the banking union remain elusive. The banking sector remains fragmented, overbanked and largely unprofitable. Stock market values are depressed. Cross-border banking has not picked up, hence the benefits of risk diversification are not attained. The large euro area banks struggle to hold their position in the global competitive playfield.

The coronavirus crisis adds to the problems. At present, the market mechanisms are suspended under a layer of state guarantees and regulatory forbearance. As the economy recovers and the public support is lifted, however, the preexisting weaknesses will come back to the fore, magnified.

This report reviews the situation and suggests possible regulatory changes to revive the banking union, focused on three strategic goals: reducing overbanking, especially among the weaker players; favouring consolidation and efficiency among the stronger ones; and strengthening balance sheets further, while encouraging cross-border diversification. The proposed measures cover, among other areas, the crisis management mechanism, with a revamp of the instruments and functions of the SRB; banking supervision, to enhance the ECB’s action in the micro- and macroprudential fields; and the state-aid controls in the banking sector.

Download the report here.

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