European Banking Union : “Europeanising” Banks’ Financial Safety Net

Governments around the globe protect the banking sector and enhance financial stability with a framework of rules, controls and procedures, referred to as the financial safety net. In the European Union (EU), the financial safety net lies within the competence of Member States and the efforts to harmonise its various components date back to the late 1980s with partial success. However, a decisive moment occurred in 2012 when political priorities shifted and the European Council adopted a roadmap towards a banking union with the objective of breaking the sovereign-banking nexus, reducing the fragmentation of capital markets, restoring the transmission of monetary policy and normalising the flow of credit to businesses. Member States decided to coordinate their banking systems under three pillars: a Single Supervisory Mechanism for banks, a Single Resolution Mechanism and a harmonised system for the guarantee of deposits. The supervision of systemically important banks is entrusted to European Central Bank, an ex-ante mechanism for addressing cross-border bank resolution and burden sharing issues has been established and a harmonised, not yet common, deposit insurance mechanism is anticipated. In effect this means that the Member States agreed to transfer national policies regarding the financial safety net to a supranational, European, level. This study provides with a detailed analysis of each pillar focusing on the risks and challenges