Update - The banking union
The Commission believes there has to be a clear longer term vision on the
future of the EU's Economic and Monetary Union to give a sense of direction to
the reforms and decisions necessary for the EU and its Member States to tackle
Therefore, the Commission has been pushing for deeper economic integration as
one of the remedies to the current crisis. This new step in European integration
would complement our monetary union.
In this context, the Commission is putting forward the concept of a banking
The European banking union is not a new legal instrument yet. It is a
political vision for more EU integration, which will build on recent major steps
to strengthen the regulation of the banking sector and go further.
The concept of a banking union was put forward by President Barroso at the
last informal European Council, which took place on 23 May. It has been
attracting a lot of attention in the political debate since this meeting and
ranks high on the agenda of the next European summit.
The full benefits from deepening the economic and monetary union and from
creating the banking union could only be reaped by the development of the fiscal
The full benefits from deepening the economic and monetary union and from
creating the banking union could however only be reaped by the development of
the fiscal union
The President of the European Council will present a report in close
collaboration with the President of the European Commission, the Chair of the
Eurogroup and the President of the European Central Bank to the next European
Council (28-29 June).
In the context of the preparation of this report, the main building blocks
towards a deeper economic and monetary integration including the banking union
and the fiscal union will be extensively discussed as well as the working
Once this vision is agreed at political level, the Commission will propose
the necessary measures for implementation.The Commission could make proposals as
early as Autumn 2012.
And it also wants the Council and EP to accelerate the decision-making
process on key legislation already in the pipeline.
1. EU banking regulation: what have we done?
Since the beginning of the crisis, the European Commission has tabled around
30 proposals to improve regulation of the financial system and benefit the real
This represents a solid basis to go further for creating a banking union.
The Commission has also contributed to strengthening financial stability in
the banking sector through its state aid control policy and the different
stability and adjustment programmes.
The Commission took the following actions:
1.1 Measures to allow for more integrated banking supervision:
- Three European supervisory authorities (ESAs) were established on 1 January
2011 to introduce a supervisory architecture:
- the European Banking Authority (EBA), which deals with bank supervision,
including the supervision of the recapitalisation of banks,
- the European Securities and Markets Authority (ESMA), which deals with the
supervision of capital markets
- and the European Insurance and Occupational Pensions Authority (EIOPA),
which deals with insurance supervision.
The 27 national supervisors are represented in all three supervising
authorities.Their role is to contribute to the development of a single rulebook
for financial regulation in Europe, solve cross-border problems, prevent the
build-up of risks, and help restore confidence.
Individual ESAs have specific roles:
for example ESMA is the EU supervisor of credit rating agencies, while EBA
and EIOPA carry out "stress tests" of their respective sectors.
EBA has also overseen the current recapitalisation exercise of EU Banks.
ESMA can ban products that threaten the stability of the overall financial
system in emergency situations.
In addition, the European Systemic Risk Board (ESRB) has been tasked with the
macro-prudential oversight of the financial system within the Union.
This new financial supervision framework has been in place since November
EBA has done a good job and established quickly its credibility as a new
Its merits have to be judged within the constraints of the rules agreed by
Council and European Parliament.
Most of the banking supervisory powers today remain in the hands of national
supervisors, with EBA in a coordinating role.
For the future, it is clear that there is a need to create direct supervisory
powers at EU level.
For more information on financial supervision, see MEMO/10/434.
1.2 Strengthening the banking system,
By securing better capitalisation:
Banking institutions entered the crisis with capital that was insufficient
both in quantity and in quality, leading to unprecedented support from national
With its proposal on bank capitalisation ("CRD IV") made in July last year
(IP/11/915) (MEMO/11/527), the Commission launched the process of implementing
for the European Union the new global standards on bank capital agreed at the
G20 level (most commonly known as the Basel III agreement).
Europe is playing a leading role on this matter, applying these rules to more
than 8,000 banks, representing 53% of global assets.
The Commission proposals are currently being discussed by Council and
European Parliament and the Commission expects agreement to be reached shortly.
The Commission also wants to set up a governance framework giving national
supervisors new powers to monitor banks more closely and take action through
possible sanctions when they spot risks, for example to reduce credit when it
looks like it is growing into a bubble.
European supervisors would intervene in some cases, for example when national
supervisors disagree in cross-border situations.
For more information on EU measures on bank capitalisation, see IP/11/915.
By facilitating banking sector restructuration:
Extensive financial sector conditionality has been included among the policy
requirements addressed to Member States that have received international
With respect to the banking sector, the required policy measures consist, on
the one hand, of the orderly winding-down of non-viable institutions and, on the
other hand, of the restructuring of the viable banks.
Higher capital requirements, recapitalisations of banks, stress tests,
deleveraging targets as well as enhancing the regulatory and supervisory
frameworks have also been part of the policy initiatives.
While not specific to programme countries, these stabilisation measures are
most easily implemented in the context of international financial assistance.
Further, it is recalled that the European Financial Stability Facility (EFSF)
can provide loans to a non-programme euro area Member States for the specific
purpose of recapitalising financial institutions, with the appropriate
conditionality, institution-specific as well as horizontal including structural
reform of the domestic financial sector.
Specific bank restructuring under the programme goes hand in hand with the
conditionality of EU state aid rules.
By offering more protection to bank deposits:
Thanks to EU legislation, bank deposits in any Member State are already
guaranteed up to €100,000 per depositor if a bank fails.
From a financial stability perspective, this guarantee prevents depositors
from making panic withdrawals from their bank, thereby preventing severe
In July 2010, the Commission proposed to go further, with a harmonisation and
simplification of protected deposits, faster pay-outs and improved financing of
schemes, notably through ex-ante funding of deposit guarantee schemes and a
mandatory mutual borrowing facility.
The idea behind this is that if a national deposit guarantee scheme finds
itself depleted, it can borrow from another national fund.
This would be the first step towards a pan-EU deposit guarantee scheme.
This proposal is still being discussed by the Council and Parliament in
The Commission calls upon the legislators to speed up the process of
co-decision on this proposal, retaining the mutual borrowing facility.
In managing a number of bank crisis over recent years, national authorities
have often created a new structure out of the failing bank and transferred some
critical functions of the bank to this structure, such as safeguarding deposits.
This resolution mechanisms make sure that depositors never lose access to
their savings (for example in the case of Northern Rock, the bank was split up
in a good bank, which contained the deposits and good mortgage loans, and a bad
bank winding-down the impaired loans).
For more information on the Commission's proposal for a European system of
deposit guarantees, see IP/10/918.
By calibrating its state aid control:
How has the Commission controlled state aid to banks during the crisis?
When financial markets were on the brink of collapse, the natural instinct of
some policy-makers was to put our common rules aside and act unilaterally.
Without some form of EU-wide coordination, we could have seen a subsidy race,
massive transfers of capital from one country to another, and probably the end
of the internal market as we know it.
We were quick to put into effect a crisis regime.
In autumn 2008, the Commission swiftly published guidance explaining how
Member States could assist distressed banks or businesses in line with EU
This guidance was based on Article 107(3)(b) of the Treaty on the Functioning
of the EU (TFEU), which allows state aid to remedy a serious disturbance in the
economy of a Member State.
A first Communication, adopted in October 2008, spelt out basic principles
for support schemes, such as keeping support limited in time and scope, ensuring
that eligibility for a support scheme was not based on nationality or avoiding
that beneficiary banks unfairly attract new additional business solely as a
result of the government support (see IP/08/1495).
A good illustration is the Irish support scheme for banks, which was amended
so as to ensure a non-discriminatory coverage of banks with systemic relevance
to the Irish economy, regardless of origin(see IP/08/1497).
This was followed by a Communication on the recapitalisation of banks in
December 2008, tackling the need to recapitalise banks, address solvency issues
and access to credit for the real economy (see IP/08/1901) and in February 2009
by the "Impaired Assets Communication" providing a framework to deal with the
problems of toxic assets (see IP/09/322).
Finally, in July 2009, the Commission adopted the "Restructuring
Communication", providing clarity on how the Commission would examine the
restructuring of banks so that they can return to long-term viability, share the
weight of the cost of their rescue, and address any distortions of competition
resulting from the large amounts of aid the banks received(see IP/09/1180).
Since 1 January 2011, every bank requiring state support in the form of
capital or impaired asset measures has had to submit a restructuring plan (and
not only distressed banks, as in the past).
Cases illustrating how the restructuring of important banks was guided by
these rules include KBC (see IP/09/1730) and Lloyds (see IP/09/1728).
What has been the Commission's practice so far?
When controlling state aid to banks, the Commission has been acting as a de
facto crisis-management and resolution authority at EU level, working to address
the structural problems that had been affecting many banks since well before the
Three main goals guide our work:
safeguarding financial stability, preserving the integrity of the internal
market, and ensuring that the beneficiaries of aid return to long-term
The restructuring which we asked is based on three principles:
that the bank returns to long term viability without the need for further
State support, that the bank and its shareholders and hybrid capital holders
contribute to the costs of its restructuring, and that the competition
distortions caused by the aid are mitigated.
For instance, we have asked some banks to move away from unsustainable
business models based on excessive leverage and the over-reliance on short-term
In other cases, we have required a downsizing and the simplification of
Finally, when it was clear that the viability of a bank could not be
restored, its orderly resolution was put in place.
In all cases, we ask banks to pay back the aid received from their
This condition is vital, because it addresses the moral-hazard issue and
limits the cost to the taxpayer.
To give a few examples:
this has resulted in the deep restructuring and the partial resolution of
banks such as Hypo Real Estate (see IP/11/898), Kommunalkredit (see IP/11/389),
and Northern Rock (see IP/09/1600).
The unsustainable business model adopted by some German Landesbanken has
resulted - in cases such as LBBW (see IP/09/1927) and HSH (see IP/11/1047) - in
the re-focussing on their core business.
In the case of WestLB - the viability of which could not be restored - the
result was an orderly resolution (see IP/11/1576).
In other occasions, governments have had to take over the burden of wrong
business decisions adopted by systemically important banks.
In these cases, we have requested a downsizing and the significant
simplification of banking structures, such as with ING and Commerzbank (see
How long will the crisis regime for state aid to the financial sector
apply? What will happen afterwards?
State aid control in the crisis always had two goals:
on the one hand, we had to put out the fire;
on the other, we prepared the ground for the post-crisis scenario.
Since the beginning, we have imposed restructuring conditions that were
designed to bring more stability to the financial markets and to help banks
return to financing the real economy.
These conditions include that banks remunerate and eventually repay the
public support and that shareholders and hybrid-capital holders bear a fair
share of the burden to address the moral hazard issue.
We were getting ready to move from the emergency regime to more permanent,
post-crisis rules at the end of 2011.
But the renewed tensions in the markets led us to extend the crisis regime
into 2012, prolonging all four banking Communications, with some modifications.
This was mainly to ensure that the state is adequately remunerated when, as
is increasingly likely in the future, Member States decide to recapitalise their
banks using instruments such as ordinary shares, for which the remuneration is
not fixed in advance.
A revised methodology was also agreed concerning the remuneration of
guarantees for banks' funding needs - the bulk of the support to date - to
ensure that the fees banks pay reflect their intrinsic risk, rather than the
risk related to the Member State concerned or the market as a whole (see
The rules will apply as long as required by market conditions.
As soon as market circumstances allow, the Commission will adopt a permanent
regime for state aid to the financial sector.
1.3 Other measures taken to strengthen Europe's financial sector
In addition to reinforcing the supervision of the financial sector,
increasing protection for bank depositors, strengthening capital requirements
for financial firms, and improving crisis management in the banking sector, the
Commission is also working:
- to examine reform of the structure of the banking sector though the work of
the high-level expert group headed by Erkki Liikanen (see MEMO/12/129);
- to regulate shadow banking (see IP/12/253)
- to make credit ratings more reliable (see IP/11/1355);
- to tighten rules on hedge funds (see IP/09/669), short selling (see
IP/10/1126) and derivatives (see IP/10/1125);
- to revise current rules on trade in financial instruments (see IP/11/1219),
market abuse (see IP/11/1217) and investment funds (see IP/10/869);
- to curb banking pay practices that encourage recklessness (see IP/09/1120);
- to reform the sectors of audit (see IP/11/1480) and accounting (see
2. Proposals expected to enter into force shortly:
Proposal on resolution tools for banks in crisis
The Commission's proposal on recovery and resolution tools for banks in
crisis, adopted on 6 June, is the last in a series of proposed measures to
strengthen Europe's banking sector and avoid the spill-over effects of any
future financial crisis, with negative effects on depositors and taxpayers.
To ensure that the private sector pays its fair share in any future bailouts,
the EU has proposed a common framework of rules and powers to help EU countries
intervene to manage banks in difficulty.
Repeated bailouts of banks have fuelled a public perception of deep
unfairness, increased public debt and imposed a heavier burden on taxpayers.
A common EU-wide framework of tools for bank recovery and resolution would
offer tools to prevent crises from emerging in the first place and address them
early on if they do.
This will provide a set of tools allowing for the managed resolution of banks
and financial institutions where necessary.
What instruments will the European Stability Mechanism (ESM) offer for
the banking sector?
The European Stability Mechanism (ESM) will have a lending capacity of €500
For euro area Member-States not subject to a programme, the ESM will have the
possibility of providing a loan for the specific purpose of re-capitalising
The granting of such financial assistance is subject to a positive decision
of the Board of Governors of the ESM, i.e.the finance ministers of the euro area
The conditionality attached to financial assistance shall be detailed in a
Memorandum of Understanding and will include institution-specific as well as
Recapitalisations can also be conducted under a loan accompanied by a
fully-fledged macroeconomic adjustment programme.
The ESM Treaty does not currently foresee direct lending by the ESM to a
3. Measures considered for medium-term action
The Commission is ready to come in autumn with key proposals to introduce
more integrated and direct banking supervision at EU level, common deposit
guarantee and resolution funds, based on the political orientation of the
The following elements should be part of the same overall framework as the
basic principle is clear:
the sharing of risk in guarantee scheme calls for an integrated, strong
supervision of the banking sector that can ensure mutual trust between all
- an integrated system for the supervision of cross-border banks
While the current role of the European supervisory authorities is mainly to
oversee the functioning and convergence of national supervisory systems, the
Commission intends to propose the creation of banking supervision at EU level.
Our system is too fragmented to face current challenges, which is not
conducive to the necessary trust between Member States.
This requires political agreement on more and independent EU supervision.
- a single deposit guarantee scheme (DGS):
In the context of the DGS proposal in 2010, the Commission proposed the
possibility of mutual borrowing, in case one of the schemes is depleted.The
Commission is examining different options to build on that.
In addition, we consider the deposit guarantee scheme and the resolution fund
as part of the same framework, as successful resolution of a bank avoids having
to call on deposit guarantees.
- an EU resolution fund
Our proposal on recovery and resolution tools for banks in crisis can be a
first step towards an EU resolution fund.
The Commission proposes the setting up of funds at national level which would
interact and have to lend to each other under certain conditions and when
necessary in order to constitute a European system of resolution funds.
Furthermore, the closer integration of supervisory and resolution
arrangements for cross-border institutions will have to be organized in advance.
The proposal foresees the mechanisms to make sure that national authorities
and EBA cooperate for cross-border bank that face problems.
Member States are offered the option, instead of creating separate resolution
funds, to merge the DGS and the resolution financing arrangement.
The proposal has to go through the decision making process and is now on the
table of the European Parliament and of the Council.
4. Other ideas feeding reflections for the future
As to the prospects of allowing the EFSF and/or the ESM to offer aid directly
to banks, this is also an important issue.
Possibility of avoiding or breaking the link between the sovereigns and the
banks may be considered as an alternative for direct bank recapitalisation,
which is not part of the ESM Treaty for the moment in its present form.
It should nourish reflections in the future in order to go to the roots of
this current debt crisis.