The banking union
The banking union is one of the biggest milestones in the integration of EU economies and institutions since the Economic and Monetary Union (EMU) was launched. It is essential for financial stability and helps to better assess risks, thus preventing the occurrence of financial crises. The banking union is based on European legislation referred to as the Single Rulebook. A key benefit of the banking union is that it lays down strict common rules and standards for the supervision, crisis management and resolution (i.e. orderly exit) of banks in the euro area. In particular, it is designed to ensure that no public funds are used to bail out troubled banks.
The banking union currently comprises:
- the Single Supervisory Mechanism (SSM), based on the Single Supervisory Handbook, aiming to ensure consistent supervision of large banks (i.e. significant institutions)
- and the Single Resolution Mechanism (SRM) providing a single set of rules for bank resolution
As part of the banking union, the SSM helps to make banking supervision more effective and to improve cross-border cooperation and coordination. The SRM provides a framework for the resolution of banks in financial distress and enables authorities to intervene at an early stage when risks are mounting.
To further strengthen the banking union, the European Commission proposed legislation in 2015 to add a third pillar and create a European Deposit Insurance Scheme (EDIS), i.e. a single system to protect deposits. However, policymakers have so far not reached an agreement on the matter, which is why the issue is to be re-considered at a later point in time. In the meantime, efforts are being made to review the bank crisis management and deposit insurance framework. Thus, for the time being, Austrian deposits will be guaranteed by national DGSs.
The banking union is based on a Single Rulebook that applies to banks across the EU and a Single Supervisory Handbook that aims to ensure a consistent supervisory approach. Moreover, the ECB issues regulations, guidelines, recommendations and instructions for the banking system as a whole and ensures the effectiveness and consistency of the SSM.