Deutsche Bank Research

EU banking union: dismantling the concept bit by bit

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Confusion and renewed uncertainty about the design and timing of EU banking union has been caused by the statements of finance ministers from some EMU core countries, especially Germany’s Mr. Schäuble. These comments suggest that a Treaty change is viewed as necessary to establish a pan-European resolution regime and that such a regime, in turn, is a prerequisite for starting the single supervisory mechanism (SSM).

Taken together, these comments would suggest that even the hard-fought compromise on the SSM and its start in 2014 now have question marks hanging over them again. This will not happen, if only because a Treaty change is needed for pan-European resolution funding (because of implicit fiscal transfers) but not for an EU resolution regime (laying down supervisors’ intervention rights, resolution tools and bail-in rules, for example). Banking union will nonetheless be flawed right from the start: Without joint resolution funding and a joint fiscal backstop, pan-European supervision and banking union as such do not make sense and will create moral hazard and lack credibility. But everybody knew this right from the start, but chose to ignore it – and instead embarked on using Art 127(6) TFEU to avoid a Treaty change! What this really shows is that Germany and others are backtracking bit-by-bit from the initial idea of banking union and that the hoped-for effect of breaking the sovereign-bank-nexus is receding further and further away.

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Published with kind permission of Deutsche Bank Research.


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