Banking Union in Europe: Unresolved Matters Remaining?
The European Banking Union, established with the aim of creating a unified banking system across the Eurozone, has faced significant hurdles in its journey towards full implementation.
One of the key components missing from the Banking Union is the European Deposit Insurance Scheme (EDIS), intended to guarantee uniform deposit protection across the eurozone. However, progress on EDIS has been stalled due to reservations from countries like Germany, the Netherlands, and Austria, primarily due to concerns over mutualising risks and the financial stability of their national banking sectors.
The Banking Union, primarily conceived as a prudential project, has largely hindered the development of a true single market for banking products and services. The absence of effective risk-sharing mechanisms - both in banking and capital markets - restricts private investment across borders and limits the EU's capacity to respond effectively to future shocks.
The Bank Recovery and Resolution Directive (BRRD), adopted in 2014, has not worked as expected and remains controversial. The Single Resolution Board (SRB), established by the SRM Regulation in 2014, represents another step in the Banking Union's 'agencification' and raises unresolved legal, constitutional, and accountability issues. The SRM's handling of several failing banks, particularly in Italy and Spain, has been criticized for falling short of its mandate to ensure orderly resolutions 'with minimal costs to taxpayers and the real economy.'
The Capital Markets Union (CMU), a related initiative designed to support the Banking Union, has also stalled, with similar structural, regulatory, and political obstacles. The danger of fragile banks and weakened sovereigns dragging each other down in a damaging feedback loop remains very much alive, particularly in southern European countries where banks remain exposed to their own governments' debt at levels comparable to those seen during the euro crisis.
Progress in building a coherent crisis management and resolution framework has been slow, inconsistent, and often inadequate. The EU's Banking Union, despite establishing Europe-wide banking supervision, falls short of a robust crisis intervention framework. The absence of a comprehensive solution to the risks posed by interconnected banks and sovereigns continues to be a significant concern for the stability of the Eurozone.
The project not only suffers from a technocratic and somewhat flawed design, but its progress is significantly hindered by persistent political disunity within the EU, especially on critical issues like EDIS. As the EU continues to navigate these challenges, the need for a unified and effective banking system becomes increasingly urgent.
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