Towards a simpler, stronger Banking Union - Eurofi article by SRB Chair Dominique Laboureix

In last June, Parliament and Council have clinched a political deal that is applicable to all the EU member states, and which can be seen as a step towards completing the Banking Union. Whilst being an important step forward, the agreement on the Crisis Management and Deposit Insurance (CMDI) framework review may be less ambitious than the Commission’s original proposal. Crucially, the core of the reform – the new “bridge the gap” tool, which would give the possibility to partly fund bank sales through deposit guarantee scheme (DGS) funds - is not as flexible as in other jurisdictions, such as the UK.

Nevertheless, this is a good deal that sends a message to countries in the Banking Union and those planning to join. Subject to final technical discussions, policymakers have found a path forward to foster financial stability within the Union.

It is time, then, to start charting what lies ahead.

In 2022, the Eurogroup published a statement setting out the next steps toward completing the Banking Union. This statement identified the CMDI review as the first step. After that, it called for a “review of the state of the Banking Union and identification, in a consensual manner, of possible further measures with regard to the other outstanding elements to strengthen and complete the Banking Union”.

We hope this review starts soon. Certainly, some issues have been known for a very long time.

First, the Banking Union was designed with three pillars: a common supervision framework, a common resolution framework, and a European Deposit Insurance Scheme (EDIS). The third pillar, EDIS, remains unbuilt. The Commission’s EDIS proposal is now so old that it is worth recalling briefly its content.

The original proposal for EDIS included national DGSs and a European deposit insurance fund. EDIS would be built in three stages over eight years. In the first stage, ‘re-insurance’, the newly created EDIS would provide liquidity assistance and absorb part of the final loss of the national scheme in the event of a pay-out or resolution. In the second stage, ‘co-insurance’, EDIS would be able to absorb a larger share of any losses in a crisis. In the third and final stage, ‘full insurance’, EDIS would completely replace national schemes and become the sole insurance scheme for deposits in Banking union banks.

In this broader drive toward simplification, such a reform seems necessary – a one-stop shop for banks and their clients, both in normal times and during crises. A truly European, trusted system would replace the current patchwork of national frameworks. Banks, their clients, and investors could rely on a single authority across the EU, with benefits in terms of clarity, level playing field, and service quality.

This is what true simplification looks like.

Moreover, the European banking landscape is changing. At the end of last year, a large European online bank announced it had reached three million clients through its branches in a host Member State – a country of five million people. The covered deposits of these clients are currently protected by the deposit guarantee scheme of the bank’s home country. In a Banking Union with European supervisory and resolution authorities in place, this national responsibility looks increasingly misplaced. Such large figures and growing interconnections call for a European solution.

EDIS is that solution. A complete Banking Union, with its third pillar in place, would offer citizens the same minimum level of not only legal, but also financial protection across all Member States, while still involving local authorities in decision-making.

Still, a full-blown EDIS, remains divisive and, thus, elusive. 

Perhaps, incremental change is the right way to achieve progress. In April 2024, the European Parliament’s ECON Committee adopted a report on EDIS. The report outlines an initial phase—referred to as EDIS I—focused solely on providing liquidity support rather than full loss coverage. This first phase would allow DGSs in need of funds to access loans through a common fund, which would be financed by contributions from other DGSs and, if necessary, through additional repayable loans – without risk-sharing between the DGSs.

The common fund is expected to reach half of its final target level within three years of the regulation's entry into force. Although this phase does not include risk-sharing mechanisms, it would provide important liquidity backstops. 

ECON has yet to vote on the interinstitutional mandate for this key proposal. Though less ambitious than the original third pillar of the Banking Union, it could still pave the way for progress towards a more effective, ultimately simpler, crisis management framework. 

Now may be the right time to revive this essential debate.