The banking union is an EU-level banking supervision and resolution system which operates on the basis of EU-wide rules.
It aims to ensure that the banking sector in the euro area and the wider EU is safe and reliable and that non-viable banks are resolved without recourse to taxpayers' money and with minimal impact on the real economy.
The banking union members are all euro area countries and those EU member states that choose to participate.
All countries that adopt the euro in future will automatically become members of the banking union. The non-eurozone countries can join by establishing a close cooperation agreement.
The banking union aims to:
- ensure banks are robust and able to withstand any future financial crises
- prevent situations where taxpayers' money is used to save failing banks
- reduce market fragmentation by harmonising the financial sector rules
- strengthen financial stability in the euro area and the EU as a whole
The banking union is comprised of 3 main building blocks:
- The single rulebook
- The Single Supervisory Mechanism
- The Single Resolution Mechanism
The single rulebook
The single rulebook is the backbone of the banking union and financial sector regulation in the EU in general. It consists of a set of legislative texts that are applied to all financial institutions and all financial products across the EU.
Specifically, its rules include capital requirements for banks, improved deposit guarantee schemes and rules for managing failing banks.
The aim of having a single rulebook is to ensure that banks are regulated according to the same rules in all EU countries so as to avoid distortions of the single market and to ensure financial stability across the EU.
The Single Supervisory Mechanism
The Single Supervisory Mechanism is the EU's supranational bank supervisory body, where responsibility for supervising financial institutions is exercised by the European Central Bank in close cooperation with national supervisory authorities.
The Mechanism's main aim is to ensure the soundness of Europe's financial sector through regular and thorough checks of bank health. The checks are carried out on the basis of rules that are the same for all EU countries.
The Single Resolution Mechanism
The Single Resolution Mechanism is a system for effective and efficient resolution of non-viable financial institutions. It is made up of the central resolution authority (the Single Resolution Board) and a Single Resolution Fund. The Fund is to be used in cases of bank failure and is financed entirely by Europe's banking sector.
Further steps in the banking union: risk reduction and deposit protection
The Council is working on further risk-reduction and risk-sharing measures to strengthen the banking union. The proposed measures include additional capital requirements for banks, action to reduce discrepancies in how the EU's banking union legislation is applied in the member states and the establishment of a European deposit insurance scheme.
Amendments to the banking union rules
In December 2016 the Council started working on a set of proposals which aim to amend existing banking union rules. The main goals are to further strengthen the resilience of banks and enhance financial stability in the EU and to align the EU's banking union rules with a number of international standards, in particular, those agreed within the Basel Committee on Banking Supervision and by the Financial Stability Board.
Why banking union?
The recent financial crisis demonstrated the need for better regulation and supervision of the EU financial sector, particularly in the euro area.
The crisis in the euro area and differing national responses to it highlighted the inter-dependency between banks and national governments. Moreover, different national solutions led to fragmentation of the single market in financial services, which in turn contributed to disruptions in lending to the real economy.
The EU leaders therefore agreed that the Economic and Monetary Union (EMU) needed to be strengthened further and that part of that effort would involve the creation of an integrated financial framework, later renamed the banking union.