15-01-2020 | Cs

Paper prepared for ECB Conference on “Fiscal Policy and EMU Governance”, Frankfurt, 19 December 2019

Nearly eight years after its inception, the European Banking Union is crumbling. None of its two stated objectives—breaking future contagion between banks and sovereigns, and creating a true single market for banks—have been achieved. In fact, the banking market is more fragmented now than it was at the inception of the Banking Union, as home and host regulators for cross-border European banks fight to ensure sufficient capital and liquidity in each market that a bank might operate in.

The reason for this state of affairs is that, of the planned “three pillar” structure of the Banking Union, only its “first pillar” (the Single Supervisory Mechanism), is working smoothly. The “second pillar”, the Single Resolution Mechanism, is being circumvented, along with the bank resolution framework, while Member States continue to spend taxpayer money to prevent investors from incurring losses. The “third pillar”, a European deposit insurance, has been paralyzed for four years. This paper aims to provide a politically and economically viable path to revive our Banking Union.

This path rests on two legs. First, creating a model “Safe Portfolio” and incentivizing banks to move toward it. Such “Safe Portfolio” would be the basis for a market-provided European Safe Asset without joint liability. Second, empowering the Single Resolution Board by reforming the resolution framework and setting up a European deposit insurance. 

 

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