In an article published by SRB, Mairead McGuinness, the European Commissioner for Financial Services, Financial Stability, and Capital Markets Union, discussed the progress and next steps toward completion of the Banking Union. She highlighted that an incomplete Banking Union puts the to-date progress at risk and listed the four ongoing workstreams in EU to complete the Banking Union: crisis management, European Deposit Insurance Scheme (EDIS), enhanced cross-border integration, and regulatory treatment of sovereign exposures and financial stability. EC is shortly expected to launch a public consultation on the planned revision of the bank crisis management and the deposit insurance frameworks. The feedback from this consultation will be an input to the EC proposal, which is due to be published by the end of 2021.
According to Ms. McGuinness, the still-missing elements include the third pillar of the Banking Union—namely a European deposit insurance scheme (EDIS)—as well as a credible solution for liquidity in resolution. Without the third pillar, EU has single supervision and single resolution, but fragmented national deposit guarantee schemes—undermining the whole project. She highlighted the need to move faster where "where the consensus for reform is greater," for example, on revising the bank crisis management framework. EC will assess all options on the table, with some of the options including creation of additional crisis management tools for certain banks, such as setting up more centralized administrative liquidation tools or substantial harmonization of insolvency laws of member states. Assessments should also cover whether the current funding architecture is fit for purpose and the role for deposit guarantee schemes in a broad range of possible interventions. In doing so, "re-nationalisation" of the cost of dealing with of failing banks should be avoided, as it may add to further market fragmentation and the bank-sovereign feedback loop. She also noted the need continue work on mitigating the sovereign-bank nexus and the need to start discussions "in earnest" on a "credible mechanism that meets international standards to provide liquidity in resolution."
She recognized that resolving the debate on the design of EDIS remains difficult. Over the years, the debate has evolved toward a "hybrid" model, which would be based on the co-existence of national deposit guarantee schemes with a common central fund. Initially, EDIS would provide liquidity or loans to national deposit guarantee schemes in need, already bringing tangible benefits for financial stability and the resilience of national banking sectors. The hybrid model can be designed so that it would evolve over time. Nevertheless, EC remains convinced of the need for a more ambitious EDIS setup involving loss mutualization in the steady state of the Banking Union. Progress on common deposit insurance should unlock some of the difficulties around home-host issues and ring-fencing practices. The challenge is how to reconcile financial stability with financial integration, particularly during the COVID crisis. At the Euro Summit, EU leaders agreed the next step, by inviting the Eurogroup in inclusive format to prepare, on a consensual basis, a stepwise and time-bound work plan on all the remaining elements needed to complete the Banking Union. In conclusion, Ms. McGuinness emphasized the importance of finding a way forward, despite the existing challenges and noted that EC remains "committed to working toward unblocking difficulties and making progress so that we can move forward with the completion of the Banking Union."
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Keywords: Europe, EU, Banking, Banking Union, EDIS, Resolution Framework, Sovereign Framework, Crisis Management Framework, EC, SRB
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