Banking union

What is the banking union?

The banking union is a crucial step in achieving the EU's economic and monetary union.

It consists in a framework of rules, procedures and tools designed to ensure that banks within the euro area are more resilient, better supervised, and able to withstand financial crises.

The key objectives of the banking union are to:

• strengthen banks’ safety and soundness to ensure that they can withstand future financial crises
• resolve non-viable banks without resorting to using taxpayers' money and with minimal impact on the real economy
• reduce market fragmentation by harmonising banking rules and supervision

• Economic and monetary union

Which are the participating countries?

The banking union automatically includes the euro area member states.

With the accession of Bulgaria and Croatia, which happened on 1 October 2020, the banking union currently comprises 21 member states.

Non-euro area member states have the option to join the banking union by entering into close cooperation with the European Central Bank (ECB). This allows them to participate in the banking union's supervisory and resolution mechanisms without adopting the euro.

Why was the banking union created? 

The banking union was established in response to the 2008 financial crisis and the subsequent euro area debt crisis.

 These crises showed the deep interconnections within the euro area banking sector, where financial distress in one country can quickly spill over into others, impacting the financial stability of the entire region.

The banking union was thus created in 2014 to provide for a new and better integrated European architecture for banking supervision and resolution. The new rules built on pre-existing banking regulatory framework

Its ultimate purpose is to strengthen the safety and soundness of Europe's banks to make them more resilient and enhance confidence in the financial system.

• Banking regulation

What are the pillars of the banking union?

The banking union is based on three pillars. The first two are fully operational and apply to euro area countries and to non-euro area countries on a voluntary basis:

• single supervisory mechanism
• single resolution mechanism
• European deposit insurance scheme

The single supervisory mechanism

The single supervisory mechanism (SSM) is the EU's supranational bank supervisory body.

The European Central Bank is responsible for supervising credit institutions established in the banking union in close cooperation with national supervisory authorities. The ECB and the national supervisors work together to:

• ensure that banks comply with the EU single rulebook
• address potential threats to financial stability early on

• How the EU supervises the banking sector
• Single supervisory mechanism (European Central Bank)

The single resolution mechanism

The single resolution mechanism (SRM) is a system for the effective and efficient resolution of non-viable credit institutions. Its aim is to ensure the resolution of failing banks with minimal costs for taxpayers and for the real economy.

The single resolution mechanism functions through:

• the single resolution board
• a single resolution fund

• How the EU resolves failing banks
• Single resolution mechanism (Single Resolution Board)

European deposit insurance scheme

The deposit guarantee scheme (DGS) system ensures that deposits made at banks are protected up to €100 000 if the bank fails. Deposits are currently protected at member state level by national deposit guarantee schemes.

In 2015, the European Commission proposed to establish a common system for deposit protection known as the European deposit insurance scheme (EDIS). By providing a uniform level of protection for bank deposits, EDIS aims to:

• ensure that depositors are protected equally, regardless of their bank's location in the euro area
• break the link between banks and their national governments, reducing the risk of financial contagion
• enhance the ability to handle banking crises more efficiently, minimising the potential impact on the economy

EDIS is still at the proposal stage and has not yet been adopted by the co-legislators.

• European deposit insurance scheme (European Commission)