Can Europe's banking union ever be completed?
The banking union started in 2014 with the transfer of prudential supervisory authority over euro-area banks from national bodies to the European Central Bank. Thus, was born the crisis-prevention component of the banking union project, known as European Banking Supervision or the Single Supervisory Mechanism. It has been a resounding success. As a result, there are currently no worries about the safety and soundness of euro-area banks, which is tremendously helpful at a time of elevated external threats and internal political uncertainties. This achievement demonstrates the European Union’s ability to get things done and is well worth celebrating.
Nearly everyone agrees that the other component of the banking union project, which is about crisis management and resolution, is incomplete and that there is a need for reform. The latest attempt to do so incrementally, known by the initials CMDI for crisis management and deposit insurance, appears to be failing with a recent compromise among finance ministers that the European Commission has described as even worse than the status quo. Instead, what is needed is a legislative package that shifts the entire banking crisis intervention framework to the European level, as was done with supervision. Simultaneously, banks’ concentrated sovereign exposures should be disincentivised by regulation so that member states do not subvert the Europe-wide safety net to secure preferential funding from domestic lenders.
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All this is achievable but will require more commitment from top leaders than they have provided in recent years. Europe’s interest is not to procrastinate, but rather to build on the banking union’s initial accomplishments and finish the work before the next systemic financial crisis erupts.