Brussels,

Banking Union

In response to the 2008 financial crisis, EU is establishing a unified rulebook for financial players across the EU's 27 countries. This rulebook includes heightened prudential standards for banks, enhanced depositor protection, and mechanisms for managing failing banks. This foundation laid the groundwork for the Banking Union.

Given the evolving financial crisis into the euro area debt crisis, deeper integration of the banking system became crucial for the interconnected euro area countries. This led to the establishment of a Single Supervisory Mechanism (SSM) and a Single Resolution Mechanism (SRM) for banks in the banking union. While the first two pillars of the banking union, SSM and SRM, are fully operational, the third pillar, the European Deposit Insurance Scheme (EDIS) or Crisis Management and Deposit Insurance (CMDI) , is yet to be implemented.

Despite the progress, the EDIS legislative process has been delayed for over seven years. In April 2023, the European Commission proposed strengthening the EU bank crisis management and deposit insurance framework, with a focus on smaller banks, to enhance the SRM and advance the banking union's completion. The Commission's second single supervisory mechanism report also affirmed the SSM's success and effectiveness.

Bank Crisis Management

The European Union's bank crisis management framework aims to ensure the stability and resilience of the financial sector, protect depositors, and minimize the potential impact of bank failures on the broader economy.

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The goals of EU bank crisis management can be summarized as follows:

1. Financial Stability: One of the primary goals is to maintain the stability of the financial system. By effectively addressing and resolving the crisis situations of individual banks, the EU seeks to prevent the spread of financial contagion that could lead to systemic risks and destabilize the entire banking sector.
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2. Depositor Protection (CMDI): Protecting the interests of depositors is a key objective. Crisis management measures are designed to ensure that depositors' funds are safeguarded and that depositors have access to their funds, even in the event of a bank failure. This helps maintain confidence in the banking system.

3. Minimize Systemic Impact: The crisis management framework aims to minimize the systemic impact of bank failures. By resolving failing banks in an orderly and controlled manner, the EU seeks to prevent a domino effect that could disrupt financial markets and impact economic stability.

4. Resolution in an Orderly Manner (SRM): The goal is to resolve failing banks in a way that avoids the need for taxpayer-funded bailouts. Instead, the emphasis is on using the resources of the failing institution itself, as well as the Single Resolution Fund, to facilitate a smooth resolution process.

5. Effective Supervision and Oversight (SSM): Effective crisis management requires strong supervision and oversight. The EU's framework includes mechanisms for coordinating and cooperating with national supervisory and resolution authorities, as well as centralizing authority through bodies like the Single Resolution Board (SRB).

6. Minimize Disruption to Services: The goal is to ensure the continuity of critical banking services, even during a crisis. Measures are taken to minimize disruptions to essential financial services, payments, and lending activities that are crucial to the functioning of the economy.

7. Fair Treatment of Creditors: The crisis management framework seeks to ensure fair and consistent treatment of creditors, including shareholders and debt holders. This may involve using resolution tools like bail-ins, where creditors contribute to covering losses before public funds are used.

8. International Cooperation: Given the interconnectedness of global financial systems, the EU's crisis management goals also involve cooperation and coordination with international counterparts and bodies to address cross-border banking crises effectively.

9. Maintain Public Confidence: Building and maintaining public confidence in the banking system is vital. By demonstrating a credible and effective crisis management framework, the EU aims to reassure the public, investors, and market participants that the financial system is resilient and capable of withstanding shocks.

Single supervisory mechanism (SSM)

The single supervisory mechanism (SSM) is the first component, or ‘pillar’, of the banking union.

Under the SSM, the European Central Bank (ECB) is the central prudential supervisor of financial institutions:

• in the euro area
• in non-euro EU countries that choose to join the SSM​

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1. Concerning Euro EU Member States, SSM gives the European Central Bank certain supervisory powers over the EU financial system. By this Regulation the ECB does the following.
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• Directly supervises significant banks. A bank may be deemed as significant depending on its size, its importance to the domestic banking sector or whether it has been recapitalised by public funds. The ECB has the authority to:
  • conduct supervisory reviews, on-site inspections and investigations;
  • grant or withdraw banking licences;
  • assess a bank’s acquisition and disposal of qualifying holdings;
  • set higher capital requirements (‘buffers’) to counter current or future financial crises;
  • impose sanctions for any breach of EU law on credit institutions, financial holding companies* and mixed financial holding companies*.
• Indirectly supervises banks that are considered to be less significant and are directly supervised by their national supervisory authorities.

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2. For the cooperation with non-euro EU Member States, there are one Regulation and two Decisions more:

• ​Regulation (EU) No 468/2014 establishing the framework for cooperation within the Single Supervisory Mechanism between the European Central Bank and national competent authorities and with national designated authorities (SSM framework regulation) (ECB/2014/17)
• Decision 2014/434/EU on the close cooperation with the national competent authorities of participating non-euro Member States (ECB/2014/5) (ECB decision on close cooperation)
• Decision (EU) 2020/1015 establishing close cooperation between the European Central Bank and Българска народна банка (Bulgarian National Bank) (ECB/2020/30)

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3. Concerning the supervisory fees, there are one Regulation and one Decision more to the basic Regulation. Let's all three texts:

Regulation (EU) No 1024/2013 lists specific tasks for the European Central Bank (ECB) including levying an annual supervisory fee* on credit institutions*. This Regulation also establishes, in its Article 30, the principle of the payment of supervisory fees. It states that:

• the ECB:
  • levies an annual fee on all banks and branches falling within the scope of European banking supervision to cover the cost of its tasks and responsibilities;
  • establishes how to calculate the fees after conducting public consultations and analysing potential costs and benefits;
  • may require advance payments of the fee based on a reasonable estimate;
• supervisory fees:
  • are based on, and should not be higher than, the ECB’s expenditure on the specific supervisory tasks;
  • are determined by objective criteria linked to the importance and risk profile of the particular credit institution, including its risk weighted assets;
  • national authorities may levy fees under national law for costs they incur.

Regulation (EU) No 1163/2014 (ECB/2014/41) lays down the methodology and criteria for calculating the total amount of annual supervisory fees, their breakdown by supervised entity and supervised group and how the ECB collects them.

• This Regulation states that:
• the ECB levies an annual supervisory fee from each supervised credit institution or branch (the fee debtor*) established in a participating Member State;
• the annual supervisory fees to be levied on the supervised entities are calculated on the basis of the expenses incurred by the ECB in the relevant fee period that are directly or indirectly related to its supervisory tasks;
• total assets and total risk exposure (each 50%) of the fee debtor determine the annual fees. Specific rules apply to:
  • new supervised entities and entities no longer supervised or whose status has changed;
  • the split of annual costs between significant and less significant supervised entities;
  • the minimum fee component (a fixed 10% of the annual supervisory fee). This may be halved for entities and groups with total assets below specific thresholds;

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• the ECB:
  • cooperates with national competent authorities to ensure supervision remains cost-effective and reasonable for all credit institutions and branches;
  • issues fee notices annually to each fee debtor within 6 months of the fee following period and the amount due is to be paid within 35 days of the date of issuance of the fee notice;
  • applies interest on any outstanding amounts of the supervisory fee;
  • may impose sanctions;
  • submits an annual report to the European Parliament, Council of the European Union, European Commission and Eurogroup.

Decision (EU) 2019/2158 (ECB/2019/38) states that:
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• the ECB determines the respective fee factors in accordance with the total risk exposure amount and total assets for supervised entities and groups;
• fee debtors intending to exclude assets and/or risk exposure of subsidiaries in non-participating Member States or in non-EU countries must notify the ECB;
• national competent authorities ensure the quality and reliability of the fee factors they receive in standard templates from fee debtors before submitting them to the ECB.

Single Resolution Mechanism (SRM)

The single resolution mechanism (SRM) is a central institution for bank resolution in the EU, and the second pillar of the main components of the banking union.

The Single Resolution Mechanism (SRM) is a key component of the European Union's banking union framework, which was established to address the issues revealed during the financial crisis of 2007-2008 and subsequent Eurozone sovereign debt crisis. The SRM, adopted with the Regulation (EU0 806/2014, became fully operational on January 1, 2016. Its primary objective is to ensure that failing banks within the Eurozone can be resolved in an orderly and effective manner while minimizing the use of taxpayer funds.
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The main features of the Single Resolution Mechanism include:

1. Single Resolution Board (SRB): The SRB is a central authority responsible for the resolution of significant banks across the Eurozone. It operates independently from national authorities and the European Central Bank (ECB). The SRB plays a key role in planning and implementing the resolution process.

2. Resolution Plans: Banks deemed "significant" are required to submit detailed resolution plans to the SRB. These plans outline how the bank can be resolved in case of severe financial distress or failure without causing systemic disruptions. The plans include measures such as transferring assets, selling parts of the business, or recapitalization.

3. Resolution Tools: The SRB has access to several resolution tools that can be applied in the event of a bank's failure. These tools include:

   - Bail-in: This tool allows a failing bank's shareholders and creditors to absorb losses and contribute to recapitalizing the bank before any public funds are used.
   
   - Bridge Institution: If necessary, a bridge institution can be created to temporarily take over critical functions of a failing bank, allowing for a smoother transition to new ownership or resolution.

   - Asset Separation: Certain assets and liabilities of the failing bank can be transferred to a separate entity, often referred to as a "bad bank," to isolate toxic assets from the healthy parts of the business.

   - Sale of Business: Another bank or investor can be identified to acquire parts of the failing bank's business, helping to maintain financial stability.

The establishment of the Single Resolution Mechanism aims to provide a consistent and coordinated approach to resolving failing banks within the Eurozone. By ensuring that failing banks can be resolved without destabilizing the broader financial system, the SRM contributes to a more resilient and stable banking sector. Please note that developments may have occurred after September 2021, and I recommend consulting official EU sources for the most up-to-date information.

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Regulation (EU) No 806/2014 

The Single Resolution Mechanism (SRM) is a key component of the European Union's banking union framework, which was established to address the issues revealed during the financial crisis of 2007-2008 and subsequent Eurozone sovereign debt crisis. The SRM became fully operational on January 1, 2016. Its primary objective is to ensure that failing banks within the Eurozone can be resolved in an orderly and effective manner while minimizing the use of taxpayer funds.

The establishment of the Single Resolution Mechanism aims to provide a consistent and coordinated approach to resolving failing banks within the Eurozone. By ensuring that failing banks can be resolved without destabilizing the broader financial system, the SRM contributes to a more resilient and stable banking sector. Please note that developments may have occurred after September 2021, and I recommend consulting official EU sources for the most up-to-date information.

European Deposit Insurance Scheme (EDIS) - Crisis Management and Deposit Insurance (CMDI)

1. European Deposit Insurance Scheme (EDIS)

The European Deposit Insurance Scheme (EDIS) is a proposal aimed at creating a common deposit insurance framework for banks within the European Union. Its primary goal is to enhance depositor protection and promote financial stability across EU member states. EDIS is a component of the broader EU banking union initiative, which seeks to establish a more integrated and harmonized banking and financial system across the member states.

Key features and goals of EDIS include:

- **Deposit Protection:** EDIS aims to provide a consistent level of protection to bank depositors across all EU member states. It would ensure that depositors' funds up to a certain threshold are safeguarded in case of a bank failure.

- **Risk Reduction and Risk Sharing:** EDIS is designed to contribute to both risk reduction and risk sharing. Risk reduction involves measures to reduce the likelihood of bank failures and improve the stability of the banking system. Risk sharing refers to the idea that financial burden should be shared collectively across EU member states, rather than falling solely on the affected country's resources.

- **Phased Implementation:** The implementation of EDIS was proposed to occur in several phases, allowing for a gradual transition to a fully integrated system. The first phase would involve the establishment of a national deposit insurance system in each member state, followed by the establishment of a European Deposit Insurance Fund (EDIF), which would provide financial support in case of significant cross-border bank failures.

- **Mutualization:** The ultimate aim of EDIS is to achieve a level of mutualization where the EDIF would be funded by contributions from both national deposit insurance systems and a European component. This would lead to the pooling of resources to manage and cover potential losses from bank failures.

2. **Crisis Management and Deposit Insurance (CMDI)

"Crisis Management and Deposit Insurance" (CMDI) seems to be a broad term that could encompass various aspects of how a country or a region handles banking crises and protects depositors. It could include a combination of regulatory, supervisory, and resolution measures aimed at maintaining financial stability and safeguarding depositor funds.

In the context of the EU, CMDI would likely refer to the combined approach of managing banking crises and ensuring the availability of effective deposit insurance mechanisms. This approach would involve:

- **Supervision and Regulation:** Implementing strong regulatory frameworks and effective supervisory mechanisms to prevent excessive risk-taking by banks and ensure their financial soundness.

- **Crisis Management:** Developing plans and mechanisms to manage banking crises in an orderly manner, including resolution strategies that minimize the use of public funds and protect critical financial functions.

- **Deposit Insurance:** Establishing deposit insurance systems that provide a level of protection to depositors in the event of bank failures. These systems are intended to maintain confidence in the banking system and prevent bank runs.

- **Coordination:** Coordinating efforts among national authorities, central banks, and relevant EU institutions to ensure a unified response to banking crises and deposit protection.

It's important to note that the specifics of CMDI would depend on the regulatory framework and policies of individual countries or regions, as well as any regional initiatives such as those within the European Union. For the most accurate and up-to-date information, I recommend consulting official EU documents and sources related to banking and financial regulations.

Sovereign bond-backed securities (SBBS)

The European Union is actively engaged in eliminating unwarranted regulatory barriers that hinder the advancement of SBBS (Simple, Transparent, and Standardized Securitization), a novel financial instrument. SBBS has the potential to mitigate risk within the banking union by facilitating additional diversification of portfolios within the banking sector.

Sovereign bond-backed securities (SBBS) are a novel financial instrument backed by a diversified portfolio of euro area central government bonds. They have been proposed as a solution to address the challenge of banks having concentrated sovereign exposures, which can create vulnerabilities in the banking and fiscal sectors.

During the euro area debt crisis, the "doom loop" illustrated how a bank's financial troubles could negatively impact its home government's fiscal outlook, and in turn, weaken the banks holding its bonds, often those within its jurisdiction.

SBBS could mitigate this issue by enabling banks to diversify their sovereign holdings and reducing the link between banks and their home governments. This would enhance risk-sharing among investors and across borders without entailing mutualization of risks and losses among euro area countries. Instead, only private investors would share potential risks and losses.

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In May 2018, the Commission introduced a legislative proposal aimed at facilitating the emergence of an SBBS market. The proposal's objective is to ensure equitable treatment by eliminating unnecessary regulatory barriers and providing SBBS with the same regulatory standing as national euro-area sovereign bonds. This includes aspects such as capital requirements, eligibility for liquidity coverage, and collateral usage.

This initiative is designed to lay the groundwork for the organic growth of the SBBS market, thereby increasing the supply of euro-denominated, low-risk, and highly liquid assets. Banks and other financial entities investing in these assets will enjoy improved portfolio diversification and reduced sovereign bond portfolio risk, contributing positively to the overall stability of the financial system.

In April 2019, the European Parliament endorsed the final agreement encompassing a comprehensive array of reforms proposed by the Commission, including those related to SBBS.