The creation of the banking union marks the most important milestone in European integration after the completion of Economic and Monetary Union. Providing the essential underpinnings for financial stability, the banking union helps make financial crises less likely to occur and identify risks more readily. Moreover, as the responsibility for banking supervision and resolution has been transferred to the European level, the banking union also serves to weaken the close linkages between sovereign debt and banking crises. In addition, the banking union is meant to reverse the fragmentation of financial markets in the euro area and contribute to a further deepening of economic and institutional integration.
The banking union rests on three pillars, the first two of which have already been established: the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The third pillar – a European Deposit Insurance Scheme (EDIS) – has yet to be fully implemented at the European level. The SSM, which comprises the European Central Bank (ECB) and the national supervisory authorities of the participating countries, enhances the effectiveness of banking supervision and cross-border cooperation and coordination. Under the SSM, the ECB is responsible for the supervision of the significant, systemically important banks of the euro area.
The SRM enables the competent authorities to intervene early and to recover or resolve a failing or failed bank. To establish EDIS, the national deposit guarantee schemes will have to be fully harmonized at the European level to ensure that across the EU, savings and investments up to EUR 100,000 are guaranteed.
The foundation of the banking union are the single rulebook, which comprises common EU-wide rules for banks, and the single supervisory handbook. The single rulebook spells out how to consistently apply the new rules – as laid down in the Basel III framework and the CRR/CRD IV package – for improving banks’ capitalization and liquidity levels as well as for strengthening banks’ refinancing structures. The single supervisory handbook sets out the supervisory approaches and methodologies to be applied in on-site inspections and the supervisory review and ensures the consistent and coherent conduct of supervisory tasks and processes under the SSM.