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Banking Union and EU banking sector competitiveness

Banking Union and EU banking sector competitiveness

Context

In response to the EU sovereign debt crisis (2011-2012), the European Union created the Banking Union to safeguard financial stability, deliver a safer banking sector and protect the taxpayer from the cost of bank failures. The banking union, currently covering 19 eurozone countries, is also open to other EU Member States.

Europe ‘s competitiveness and growth needs competitive banks. A genuine banking union would foster a more effective allocation of resources across the Eurozone (e.g., companies would be able to tap wider and cheaper sources of funding) and help to achieve a better diversification of risks. A fully integrated banking union would enable the emergence of transnational and competitive banking groups in the EU which would help Eurozone ‘s excess savings to circulate across borders to parts of Europe where most attractive investment opportunities exist, and to increase private risk sharing in the Union.

The conception of the Banking Union relied on three pillars: the first one is supervision, the second one is resolution, and the third one – which is still a matter of discussion among Member States – is the management of Deposit Guarantee Schemes (DGSs).

The first pillar of the banking union is the Single Supervisory Mechanism (SSM) created in 2014, a new system of banking supervision comprising the ECB and the national authorities, directly supervising the 115 most significant banks of the euro area (holding almost 82% of European assets).

The Covid-19 crisis and the banking turmoil of Spring 2023 have proved the Banking Union to promote a more resilient European banking sector. But ten years after its creation, the Banking Union has not been completed, and two of its main objectives – namely, to break the sovereign-bank loop and to create a genuinely integrated single market for banks – have not been achieved.

Despite the creation of European supervision and regulation authorities, the banking sector in Europe remains too fragmented – due to a sub-optimal capital and liquidity allocation between the parents and subsidiaries of pan-European banking groups, low profitability levels, different legal systems and so on. Many European countries’ banking systems remain overcrowded, and market concentration has only progressed at domestic level. The “national bias” continues to fragment the banking market along national lines: there are no host supervisors anymore, but the distinction between home and host authorities still exists for banks operating across borders under the remit of the SSM, hence the persistence of ring-fencing practices.

This is an element of risk because if a shock is hitting a part of the banking union, the banking sector does not work as a shock absorber by absorbing losses in one country, for instance, through profits in another country. Moreover, banks cannot create truly pan- Eurozone business because they must deal with a patchwork of national authorities ‘different rules on conduct.

These issues still need to be addressed by EU regulators and supervisors in order to catch up with the US banking sector and to foster a more profitable and unified European Banking Union.

The Banking Union also relies on an efficient Crisis Management Framework and resolution framework (second and third pillars). Find more about these topics here.

Eurofi documents

Extracted from the main Eurofi publications (Regulatory Updates, Views Magazines and Conference Summaries)

Regulatory Update

Eurofi policy notes

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Summary

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Views The Eurofi Magazine

Eurofi Views Magazine chapter

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