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European Banking Union 2.0: the Creation of a True Single Market?

Since it was first envisaged in 2012, the European banking union has very much become a reality and the crisis from which it sprang is becoming an increasingly distant memory. Nordea Bank's recent decision to relocate its headquarters to Finland from Sweden, in order to join the banking union, is seen by many as a big vote of confidence into the project. Likewise, over the summer Denmark and Sweden showed tentative interest in joining the banking union as the first non-eurozone countries. And on Oct. 11, 2017, the European Commission (EC) outlined its priorities for moving the banking union ahead. S&P Global Ratings shares the widely held view that much has been achieved in a short time. Although a completed banking union should form the centerpiece of a more resilient and well-functioning eurozone banking market, today it remains a construction site, one whose opening ceremony might be many years down the line, if at all. Indeed, it looks like workers are attaching fixtures in some parts of the house, while architects continue arguing about whether and how to erect its load-bearing wall.

Of the EC's plans for moving ahead on the banking union, some elements are new or revised proposals, while others are simply a call on lawmakers to find agreement on existing draft legislation. Notably, the EC aims for a compromise on a pan-European deposit insurance scheme (EDIS), which has ended in deadlock among member states after a legislative proposal in November 2015. Since EDIS would mutualize losses between banking systems of member states, its fate is intertwined with the tricky tasks of short-circuiting the negative feedback loop between bank and sovereign creditworthiness, and tackling the high stock of nonperforming loans in some countries. Cutting this Gordian knot will likely remain difficult despite a few elements in the EC's proposals seeking to address EDIS opponents' concerns. Specifically, the EC's initiatives aim to facilitate the diversification of banks' sovereign portfolios, strengthen the financial capacity for regulators to resolve failing banks, and enhance the legal and judicial frameworks for dealing with problematic assets. In a related proposal launched on Sept. 20, 2017, the EC seeks to afford enhanced powers to the European Banking Authority (EBA) over national regulators' activities to ensure greater regulatory convergence. Finally, on Oct. 25, 2017, EU policy makers found political agreement on the EC's proposal of May 31, 2017, on the ranking of unsecured debt instruments in insolvency hierarchy. The implementation of this legislation should catalyze the build-up of buffers of liabilities regulators can use to recapitalize a failing bank.


  • The eurozone's banking union is widely acknowledged to be a semi-successful, and thus incomplete, project.
  • We see the current state of play--Banking Union 1.0--as sustainable for the medium term, but less so in the long term, since a failure to complete the project could eventually undermine its very existence.
  • The great prize for a reinvigorated effort is to reduce interlinkages between the credit strength of banks and their domestic sovereigns.
  • Furthermore, a true single market in the eurozone could yet deliver enhanced competitiveness and diversity for internationally active eurozone banks, but first policymakers must address unresolved home-host tensions, among other things.
  • Even with progress, Banking Union 2.0 will not arrive quickly. But if it does, in time we see positive rating implications as a result.