Special edition on reforming Banking Union: introduction¹

¹This special edition is dedicated to Professor David Mayes, an inspired and inspiring scholar.

European Banking Union arguably represents the most important step in European economic integration since the launch of Monetary Union. Yet the design of the Banking Union agreed in 2012 and 2013 was flawed. The five articles of this special edition focus specifically upon ongoing efforts to reform – and, arguably, “complete” – Banking Union. One article examines the weaknesses of the Single Resolution Mechanism (SRM) agreed upon in 2013. Two articles examine the ongoing (as of early 2018) failure to create a European Deposit Insurance Scheme (EDIS) frequently presented – notably by the European Commission – as an essential component of a coherent Banking Union. A fourth article explains why both additional reforms to national deposit guarantee schemes (DGS) and the creation of the EDIS are crucial to financial stability. A fifth article focuses upon necessary reforms to the operation of the Single Supervisory Mechanism (SSM) to ensure better the financial stability of the entire EU and not just Banking Union member states.

Mayes (2018) explores the problems the EU and the SRB face in trying to implement a credible system for resolving banks without the use of taxpayer funds as a key part of Banking Union with the aim of avoiding the doom loop between indebted banks and indebted sovereigns. Mayes argues that without clear examples of how the system works in practice it is very difficult to provide convincing evidence of what will happen given the large number of options for bailing in, the continuing predilection for bailing out in some states and the lack of fiscal backstop to help tackle general threats to financial stability.

Howarth and Quaglia (2018) demonstrate that the difficulties facing the construction of an EDIS owe to the weakness of the previously agreed harmonisation of national DGS in the 2014 directive. The German government refused to accept the development of an EDIS. Publicly, German ministers expressed concern for the creation of a moral hazard that common funds would create for banks in those participating countries that had weak banking systems – notably in the euro area periphery. Howarth and Quaglia argue that to understand fully German moral hazard concerns it is also necessary to look beyond the ideational – notably concerns stemming from German Ordo-liberalism – and focus on the existing national institutional arrangements that the German government sought to protect. German moral hazard concerns stemmed from the fear that well-funded German DGS – especially those of small savings and cooperative banks – could be tapped to compensate for underfunded (and largely ex post funded) DGS in other member states. This failure to harmonise schemes beyond a low minimal standard can be explained through an analysis focused on national systems. Different national DGS stemmed from the different configuration of national banking systems, the longstanding relationships among national banks and well-entrenched regulatory frameworks. Thus, to overcome German opposition to the creation of the EDIS, the further reinforcement of national schemes appears necessary.

In his article, Donnelly (2018) explains the failure to agree the creation of the EDIS in terms of competing advocacy coalitions focused on the link between the EDIS and two incompatible areas: risk reduction measures versus increased public backstops and state aid. On the one hand, Germany and the Netherlands, with the aim of minimising potential costs, pushed for wide-ranging risk reduction measures – specifically the reduction of the sovereign debt holdings of Southern European banks. On the other hand, Italy pushed for greater public backstops and state aid. Unable to break the deadlock in the Council between these two positions, euro area member states awaited international (Basel Committee) guidance on how to deal with sovereign risk exposures in its 2017–2018 work programme.

In the fourth article, Cerrone (2018) provides an assessment of the reform of national DGS required by the DGS directive adopted in 2014¹ and, in her view, the necessary evolution of national DGS towards an EDIS. She argues in favour of further reforms to national DGS, and specifically the adoption of risk pooling and the improved calculation of bank risk-based contributions. She also argues that the move from national DGS to the EDIS is essential to efforts to bolster customer confidence in their banks.

Mérő and Piroska (2018) argue that reforms to Banking Union should be aimed at increasing the efficiency of the entire EU Single Market and enhancing the financial stability of all EU member states. They review European financial regulatory developments since the Maastricht Treaty with the aim of demonstrating that Banking Union represents a shift in the logic of regulation. The regulatory logic prior to the outbreak of the international financial crisis (from 2007) was driven by EU-wide integration and the subsidiarity concerns of member states. However, Banking Union focuses only on the euro area and it is driven by the logic of saving the euro and cutting the vicious circle between governments and domestic banks. The authors show that non euro area central and eastern European (CEE) member state governments demand a return to the old logic of financial regulation. Acknowledging that nationalist, illiberal political forces in power in the CEE member states are not likely to surrender regulatory authority, they argue that it is in the interest of all EU member states to accommodate non euro area CEE member states and that this accommodation must also reflect the subsidiary demands of CEE member state governments. Using the example of macroprudential regulation, Mérő and Piroska propose a number of reform options that – with a return to the old logic – could result in the better functioning of the SSM.

The five articles of this special issue discuss only a number of potential Banking Union reform topics. There are numerous others, including a range of possible reforms to improve both the efficiency and effectiveness of the SSM and the SRM, as well as reforms to improve the (parliamentary) accountability of the ECB on bank supervision and the efficient functioning of the SRB on resolution matters in moments of crisis asking for speedy decision-making. Furthermore, there remain a range of possible reforms to the collection of EU rules on banking – notably bank structural reform – that are the subject of major ongoing debates among member states and EU institutions.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This special edition is dedicated to Professor David Mayes, an inspired and inspiring scholar.

1. “Directive 2014/49/EU of the European Parliament and of the Council”, of 16 April 2014, on deposit guarantee schemes’. Available at: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014L0049&from=en