No time to waste in completing the Banking Union

The European Banking Union still awaits completion, with more work urgently needed to move towards a fully integrated system that delivers better crisis management, depositor protection and a stronger banking sector.

The European Commission has recently launched a review of the Crisis Management and Deposit Insurance framework. At the SRB, we have set out key changes to the system that would enable the more effective management of bank failures, in particular around deposit insurance. While we have a common deposit insurance framework in the EU through the Deposit Guarantee Scheme Directive, we lack a common deposit insurer.

Pooling resources at the central level can create a strong fund, which benefits from increased diversification of risks. Quantitative analysis around the European Deposit Insurance Scheme proposal[1] confirms that a mutualised central fund will be more efficient than many smaller funds, and reduce the risks faced by deposit guarantee schemes. It would also help address the bank sovereign nexus. Reducing the risk that individual deposit guarantee schemes prove inadequate, and are forced back onto state resources during a crisis, reduces the connection between the banking system and the state.

Under a fully integrated Banking Union, costs arising for the central fund will be distributed across the whole Union, rather than concentrated in one Member State. This reduces the pro-cyclicality of the system, where costs arising from a bank failure would otherwise mainly fall on banks within the same country.

All these measures support an important objective of the deposit guarantee system: to strengthen confidence in our financial system. Protecting depositor confidence avoids bank runs, which might otherwise overwhelm solvent banks. A fully mutualised central scheme would mean that every depositor across the Banking Union would have the same level of protection. The likelihood of depositor flight increasing systemic risk during a crisis would be reduced, given depositors would know that their protection would be the same, no matter where they live. Introduction of a fully mutualised central scheme would also entail having the same rules across Member States, with relevant control at the Banking Union level to align management and resources.

Banks may not yet see the full benefits of the Banking Union because we have not agreed measures to enable deepened cross-border integration, which would then lower their cost base or provide more opportunities. Having made strong progress in building a more resilient banking sector, there is a fair argument we also have to take measures that will support the competitiveness of European banks.

The way forward is to make progress on all elements in parallel, with European deposit insurance introduced as part of a holistic set of reforms. In particular, we should consider measures to strengthen cross-border financial integration. This would also strengthen financial stability, by boosting diversification in the banking sector.

The SRB is also working to ensure that the failure of cross-border banking groups can be managed effectively, while protecting the financial stability of all Member States. As our Chair has said, “Any revisions to the framework will have to strike a fair balance between an adequate level of pre-positioning [of capital and internal MREL] at the subsidiary level, and ensuring that resources can be deployed effectively in resolution.” Beyond the SRB’s work, further legislative amendments could enhance the framework for managing cross-border banking group failures.

Taking all these measures together, we can see that much work remains. But moving ahead on all measures together would create a virtuous circle - where increasing loss sharing and strengthening the crisis management framework builds confidence to allow for increased cross-border financial integration. This can then deliver a stronger banking sector, more capable of meeting the needs of the European people as we come out of the Covid-19 crisis and begin to invest in the recovery.