Banking Union: A New Step towards Completing the Economic and Monetary Union
This study analyzes the critical gaps in the
architecture of European stability and the expected role of the
banking union as the new important step towards completing the
Economic and Monetary Union that should enable the creation of
safe and sound financial sector for the euro area market. The single
rulebook together with the Single Supervisory Mechanism and the
Single Resolution Mechanism - as two main pillars of the banking
union, should provide a consistent application of common rules and
administrative standards for supervision, recovery and resolution of
banks – with the final aim of replacing the former bail-out practice
with the bail-in system through which possible future bank failures
would be resolved by their own funds, i.e. with minimal costs for
taxpayers and real economy. In this way, the vicious circle between
banks and sovereigns would be broken. It would also reduce the
financial fragmentation recorded in the years of crisis as the result of
divergent behaviors in risk premium, lending activities and interest
rates between the core and the periphery. In addition, it should
strengthen the effectiveness of monetary transmission channels, in
particular the credit channels and overflows of liquidity on the money
market which, due to the fragmentation of the common financial
market, has been significantly disabled in period of crisis. However,
contrary to all the positive expectations related to the future
functioning of the banking union, major findings of this study
indicate that characteristics of the economic system in which the
banking union will operate should not be ignored. The euro area is an
integration of strong and weak entities with large differences in
economic development, wealth, assets of banking systems, growth
rates and accountability of fiscal policy. The analysis indicates that
low and unbalanced economic growth remains a challenge for the
maintenance of financial stability and this problem cannot be
resolved just by a single supervision. In many countries bank assets
exceed their GDP by several times and large banks are still a matter
of concern, because of their systemic importance for individual
countries and the euro zone as a whole. The creation of the Single
Supervisory Mechanism and the Single Resolution Mechanism is a
response to the European crisis, which has particularly affected
peripheral countries and caused the associated loop between the
banking crisis and the sovereign debt crisis, but has also influenced
banks’ balance sheets in the core countries, as the result of crossborder
capital flows. The creation of the SSM and the SRM should
prevent the similar episodes to happen again and should also provide
a new opportunity for strengthening of economic and financial
systems of the peripheral countries. On the other hand, there is a
potential threat that future focus of the ECB, resolution mechanism
and other relevant institutions will be extremely oriented towards
large and significant banks (whereby one half of them operate in the
core and most important euro area countries), and therefore it remains
questionable to what extent will the common resolution funds will be used for rescue of less important institutions. Recent geopolitical
developments will be the optimal indicator to show whether the
previously established mechanisms are sufficient enough to maintain
the adequate financial stability in the euro area market.
[1] European Central Bank, “Banking Union: meaning and implications for
the future of banking“, Speech by Vítor Constâncio, Vice-President of
the ECB, at Banking Union Conference organized by the Master in
Banking and Financial Regulation, Navarra University, Madrid 24 April
2014, ECB, 2014, available: http:// www.ecb.europa.eu/press/key/date/
2014/html/sp140424_1.en.html
[2] Z. Darvas and S. Merler, “The European central bank in the age of
banking union”, Bruegel policy contribution, Issue 2013/13, 2013,
[3] World Bank, “Bank nonperforming loans to total gross loans“, World
Bank, 2014 available:
http://data.worldbank.org/indicator/FB.AST.NPER.ZS
[4] Eurostat, ”Newsrelease euroindicators: General government debt”,
Eurostat, No: 115/2014, July 2014, available:
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22072014-
AP/EN/2-22072014-AP-EN.PDF
[5] Eurostat, “Net international investment position in % of GDP - annual
data”, Eurostat, 2013, available: http://epp.eurostat.ec.europa.eu/tgm/
table.do?tab=table&language=en&pcode=tipsii10
[6] International Monetary Fund, “Euroarea Imbalances: Annex to
Umbrella”, Report for G-20 Mutual Assessment Process, IMF, 2012,
available: http://www.imf.org/external/np/g20/pdf/map2012/annex2.pdf
[7] P.R. Lane, “The European sovereign debt crisis”, Journal of Economic
Perspectives, Vol. 26, No. 3, Summer, pp. 49-68,
[8] N. Véron, „A realistic bridge towards European banking union”, Bruegel
policy contribution, Issue 2013/09, 2013,
[9] International Monetary Fund, “Euroarea Imbalances: Annex to
Umbrella”, Report for G-20 Mutual Assessment Process, IMF, 2012,
available: http://www.imf.org/external/np/g20/pdf/map2012/annex2.pdf
[10] European Central Bank, “Banking structures report”, ECB, 2014.
available at: http://www.ecb.europa.eu
[11] Eurostat, “Real GDP growth rate”, Eurostat, 2013, available:
http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=e
n&pcode=tec00115&plugin=1
[12] R.A. Mundell, “A Theory of Optimum Currency Areas.” American
Economic Review 51, No. 4, pp. 657–665,
[13] Eurostat, “Labour cost at regional level”, Eurostat, 2013,
http://ec.europa.eu/eurostat/statisticsexplained/
index.php/Labour_cost_at_regional_level
[14] M. Obstfeld, "Europe’s gamble", Brookings Papers on Economic
Activity, Vol. 28, Issue 2, pp. 241-317,
[15] A. van Rixtel and G. Gasperini, “Financial crises and bank funding:
recent experience in the euro area”, BIS Working Papers, No. 406, 2013,
[16] J.C. Shambaugh, “The euro’s three crises”, Brookings Papers on
Economic Activity, Vol. 44, Spring, pp. 157-231,
[17] European Central Bank, “Financial integration in Europe”, April 2014,
available: http://www.ecb.europa.eu/pub/pdf/other/
financialintegrationineurope201404en.pdf
[18] European Commission, "Banking union: restoring financial stability in
the Eurozone", European Commission, 2014, available:
http://ec.europa.eu/finance/general-policy/docs/banking-union/bankingunion-
memo_en.pdf
[19] European Central Bank, "Banking union", ECB, Banking supervision,
2014, available: https://www.bankingsupervision.europa.eu/about/
incontext/bankingunion/html/index.en.html
[20] W. Schäuble, Banking union must be built on firm foundations,
Financial Times, May 12, 2013
[21] C. Gandrud and M. Hallerberg, “Supervisory transparency in the
European banking union”, Bruegel policy contribution, Issue 2014/01,
2014,
[22] H. Geeroms and P. Karbownik, “A banking union for an unfinished
EMU”, Martens centre, 2014,
[23] C. de Boissieu, “Towards a banking union: open issues”, Bruges
European Economic Policy Briefings 32/2014, 2014),
[24] European Central Bank, “Aggregate report on the comprehensive
assessment”, ECB, 2014. available at: http://www.ecb.europa.eu
[25] G. Bertola, J. Driffill, H. James, H.W. Sinn, J.E. Sturm and A.
Valentinyi, “Banking Union: Who should take charge?”. The EEAG
Report on the European Economy, 2014, ch. 4, pp. 91–108,
[26] European Central Bank, “Guide to banking supervision”, ECB, 2014.
available at: http://www.ecb.europa.eu
[1] European Central Bank, “Banking Union: meaning and implications for
the future of banking“, Speech by Vítor Constâncio, Vice-President of
the ECB, at Banking Union Conference organized by the Master in
Banking and Financial Regulation, Navarra University, Madrid 24 April
2014, ECB, 2014, available: http:// www.ecb.europa.eu/press/key/date/
2014/html/sp140424_1.en.html
[2] Z. Darvas and S. Merler, “The European central bank in the age of
banking union”, Bruegel policy contribution, Issue 2013/13, 2013,
[3] World Bank, “Bank nonperforming loans to total gross loans“, World
Bank, 2014 available:
http://data.worldbank.org/indicator/FB.AST.NPER.ZS
[4] Eurostat, ”Newsrelease euroindicators: General government debt”,
Eurostat, No: 115/2014, July 2014, available:
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-22072014-
AP/EN/2-22072014-AP-EN.PDF
[5] Eurostat, “Net international investment position in % of GDP - annual
data”, Eurostat, 2013, available: http://epp.eurostat.ec.europa.eu/tgm/
table.do?tab=table&language=en&pcode=tipsii10
[6] International Monetary Fund, “Euroarea Imbalances: Annex to
Umbrella”, Report for G-20 Mutual Assessment Process, IMF, 2012,
available: http://www.imf.org/external/np/g20/pdf/map2012/annex2.pdf
[7] P.R. Lane, “The European sovereign debt crisis”, Journal of Economic
Perspectives, Vol. 26, No. 3, Summer, pp. 49-68,
[8] N. Véron, „A realistic bridge towards European banking union”, Bruegel
policy contribution, Issue 2013/09, 2013,
[9] International Monetary Fund, “Euroarea Imbalances: Annex to
Umbrella”, Report for G-20 Mutual Assessment Process, IMF, 2012,
available: http://www.imf.org/external/np/g20/pdf/map2012/annex2.pdf
[10] European Central Bank, “Banking structures report”, ECB, 2014.
available at: http://www.ecb.europa.eu
[11] Eurostat, “Real GDP growth rate”, Eurostat, 2013, available:
http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=e
n&pcode=tec00115&plugin=1
[12] R.A. Mundell, “A Theory of Optimum Currency Areas.” American
Economic Review 51, No. 4, pp. 657–665,
[13] Eurostat, “Labour cost at regional level”, Eurostat, 2013,
http://ec.europa.eu/eurostat/statisticsexplained/
index.php/Labour_cost_at_regional_level
[14] M. Obstfeld, "Europe’s gamble", Brookings Papers on Economic
Activity, Vol. 28, Issue 2, pp. 241-317,
[15] A. van Rixtel and G. Gasperini, “Financial crises and bank funding:
recent experience in the euro area”, BIS Working Papers, No. 406, 2013,
[16] J.C. Shambaugh, “The euro’s three crises”, Brookings Papers on
Economic Activity, Vol. 44, Spring, pp. 157-231,
[17] European Central Bank, “Financial integration in Europe”, April 2014,
available: http://www.ecb.europa.eu/pub/pdf/other/
financialintegrationineurope201404en.pdf
[18] European Commission, "Banking union: restoring financial stability in
the Eurozone", European Commission, 2014, available:
http://ec.europa.eu/finance/general-policy/docs/banking-union/bankingunion-
memo_en.pdf
[19] European Central Bank, "Banking union", ECB, Banking supervision,
2014, available: https://www.bankingsupervision.europa.eu/about/
incontext/bankingunion/html/index.en.html
[20] W. Schäuble, Banking union must be built on firm foundations,
Financial Times, May 12, 2013
[21] C. Gandrud and M. Hallerberg, “Supervisory transparency in the
European banking union”, Bruegel policy contribution, Issue 2014/01,
2014,
[22] H. Geeroms and P. Karbownik, “A banking union for an unfinished
EMU”, Martens centre, 2014,
[23] C. de Boissieu, “Towards a banking union: open issues”, Bruges
European Economic Policy Briefings 32/2014, 2014),
[24] European Central Bank, “Aggregate report on the comprehensive
assessment”, ECB, 2014. available at: http://www.ecb.europa.eu
[25] G. Bertola, J. Driffill, H. James, H.W. Sinn, J.E. Sturm and A.
Valentinyi, “Banking Union: Who should take charge?”. The EEAG
Report on the European Economy, 2014, ch. 4, pp. 91–108,
[26] European Central Bank, “Guide to banking supervision”, ECB, 2014.
available at: http://www.ecb.europa.eu
@article{"International Journal of Business, Human and Social Sciences:70692", author = "Marijana Ivanov and Roman Šubić", title = "Banking Union: A New Step towards Completing the Economic and Monetary Union", abstract = "This study analyzes the critical gaps in the
architecture of European stability and the expected role of the
banking union as the new important step towards completing the
Economic and Monetary Union that should enable the creation of
safe and sound financial sector for the euro area market. The single
rulebook together with the Single Supervisory Mechanism and the
Single Resolution Mechanism - as two main pillars of the banking
union, should provide a consistent application of common rules and
administrative standards for supervision, recovery and resolution of
banks – with the final aim of replacing the former bail-out practice
with the bail-in system through which possible future bank failures
would be resolved by their own funds, i.e. with minimal costs for
taxpayers and real economy. In this way, the vicious circle between
banks and sovereigns would be broken. It would also reduce the
financial fragmentation recorded in the years of crisis as the result of
divergent behaviors in risk premium, lending activities and interest
rates between the core and the periphery. In addition, it should
strengthen the effectiveness of monetary transmission channels, in
particular the credit channels and overflows of liquidity on the money
market which, due to the fragmentation of the common financial
market, has been significantly disabled in period of crisis. However,
contrary to all the positive expectations related to the future
functioning of the banking union, major findings of this study
indicate that characteristics of the economic system in which the
banking union will operate should not be ignored. The euro area is an
integration of strong and weak entities with large differences in
economic development, wealth, assets of banking systems, growth
rates and accountability of fiscal policy. The analysis indicates that
low and unbalanced economic growth remains a challenge for the
maintenance of financial stability and this problem cannot be
resolved just by a single supervision. In many countries bank assets
exceed their GDP by several times and large banks are still a matter
of concern, because of their systemic importance for individual
countries and the euro zone as a whole. The creation of the Single
Supervisory Mechanism and the Single Resolution Mechanism is a
response to the European crisis, which has particularly affected
peripheral countries and caused the associated loop between the
banking crisis and the sovereign debt crisis, but has also influenced
banks’ balance sheets in the core countries, as the result of crossborder
capital flows. The creation of the SSM and the SRM should
prevent the similar episodes to happen again and should also provide
a new opportunity for strengthening of economic and financial
systems of the peripheral countries. On the other hand, there is a
potential threat that future focus of the ECB, resolution mechanism
and other relevant institutions will be extremely oriented towards
large and significant banks (whereby one half of them operate in the
core and most important euro area countries), and therefore it remains
questionable to what extent will the common resolution funds will be used for rescue of less important institutions. Recent geopolitical
developments will be the optimal indicator to show whether the
previously established mechanisms are sufficient enough to maintain
the adequate financial stability in the euro area market.", keywords = "Banking Union, financial integration, single
supervisory mechanism (SSM).", volume = "9", number = "6", pages = "2133-8", }