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European banking union to face further delays as parliamentary elections loom


According to Market Intelligence, February 2023


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European banking union to face further delays as parliamentary elections loom

EU attempts to complete banking union could remain on hold until after EU parliamentary elections in May 2019 because of divisions in the European parliament over some aspects of the plan, an EU parliament committee member on economic and monetary affairs said on Oct. 15.

"In the parliament, we continue to be divided and my worry is that we are really some months from elections," Polish lawmaker Danuta Hübner told a conference in Brussels.

The banking union project began in 2012 in the wake of the financial crisis and was aimed at improving supervision. The first two pillars, joint supervision and the single resolution mechanism, are in place; the third and final pillar, pan-European deposit insurance, has yet to be established. Another sticking point is finalizing a backstop for the eurozone's planned bank resolution fund, which would bail out ailing banks.

'A big enough crisis'

Hübner called on the European Commission to push the parliament to move on banking union and noted that France's strong relationship with Germany, which opposes a European deposit insurance scheme, may help matters. France is in favor of the scheme.

Hübner said it was key to reach an agreement on the deposit scheme that would facilitate an integrated European market, especially with regards to insolvency, which is subject to different rules in each member state.

Olivier Guersent, the European Commission's director-general for financial stability, financial services and capital markets union, told the conference that the Commission had been meeting resistance from member states and there was a feeling that there was no need to act urgently.

"They have a false impression that everything is fine, but everything is not fine because the job is half done," Guersent said. "There needs to be a big enough crisis to scare all of us, but not big enough to kill us all."

However, over the last few months there had been more willingness to move forward on the backstop, he said. However, Guersent added that there had been an agreement since December 2013, which has to be implemented by 2024.

"Those who are trying to pile up conditions in order to even start working should think about that," Guersent said.

Backstop buffer

In late June, EU leaders delayed making a decision on the details of the backstop until December. The backstop would provide a buffer of up to €60 billion to beef up the Single Resolution Fund, which is funded by banks and is used to finance bank resolutions. Single Resolution Board Chair Elke König told the conference that the fund will hold nearly €33 billion in 2019, up from €25 billion in 2018. The SRB is an EU agency which oversees bank rescues.

Guersent said a European deposit insurance scheme would better protect the banks.

Guersent noted that banking union would help close the sovereign doom loop in which governments develop a potentially unhealthy reliance on banks to buy their debt and exacerbate the eurozone debt crisis.

"As soon as there are tensions in a specific country, the doom loop has a tendency to start back again and the rate of national exposures, of total sovereign exposure, rises again," he told the conference.

"Banking union is clearly effective in cutting the doom loop provided it is implemented in full," Guersent said.

In May, the Commission set out proposals for a new class of fixed-income instrument, known as sovereign bond-backed securities or so-called safe bonds that banks would buy instead of purchasing sovereign debt in their own countries.

"We have about 100% of member states that are against that idea, but I still believe it provides for a path forward," Guersent said.