The Banking Union

Banking union

The banking union is an important step towards a genuine Economic and Monetary Union. It allows for the consistent application of EU banking rules in the participating countries. The new decision-making procedures and tools help to create a more transparent, unified and safer market for banks.

Why the banking union?

The need for a banking union emerged from the financial crisis of 2008 and the subsequent sovereign debt crisis. It became clear that, especially in a monetary union such as the euro area, problems caused by close links between public sector finances and the banking sector can easily spill over national borders and cause financial distress in other EU countries.

The purpose of the banking union is to make European banking:
more transparent	by consistently applying common rules and administrative standards for supervision, recovery and resolution of banks
unified	by treating national and cross-border banking activities equally and by delinking the financial health of banks from the countries in which they are located
safer	by intervening early if banks face problems in order to help prevent them from failing, and – if necessary – by resolving banks efficiently

Commission communication: A roadmap towards a banking union

The elements of the banking union

The banking union has two pillars:

• Single Supervisory Mechanism (SSM)
• Single Resolution Mechanism (SRM)

The two pillars rest on the foundation of the single rulebook, which applies to all EU countries.

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Source: European Central Bank,
https://www.bankingsupervision.europa.eu/about/bankingunion/html/index.en.html

Single Supervisory Mechanism

The Single Supervisory Mechanism (SSM) refers to the system of banking supervision in Europe. It comprises the ECB and the national supervisory authorities of the participating countries.

The main aims of European banking supervision are to:

• ensure the safety and soundness of the European banking system
• increase financial integration and stability
• ensure consistent supervision

European banking supervision is one of the two pillars of the EU banking union, along with the Single Resolution Mechanism.

Why do we need European banking supervision?

The recent financial crisis has shown how quickly and forcefully problems in the financial sector can spread, especially in a monetary union, and how such problems directly affect people across Europe.

The purpose of European banking supervision is to help rebuild trust in the European banking sector and increase the resilience of banks.

What is the ECB's role?

As an independent EU institution, the ECB oversees banking supervision from a European perspective by:

• establishing a common approach to day-to-day supervision
• taking harmonised supervisory actions and corrective measures
• ensuring the consistent application of regulations and supervisory policies

The ECB, in cooperation with the national supervisors, is responsible for ensuring European banking supervision is effective and consistent.

What does banking supervision entail?

The ECB has the authority to:

• conduct supervisory reviews, on-site inspections and investigations
• grant or withdraw banking licences
• assess banks' acquisition and disposal of qualifying holdings
• ensure compliance with EU prudential rules
• set higher capital requirements ("buffers") in order to counter any financial risks

Supervisory cycle

Who is supervised?

Directly supervised banks

The ECB directly supervises the 114 significant banks of the participating countries. These banks hold almost 82% of banking assets in these countries.

The decision on whether a bank is deemed significant is based on a number of criteria.

Criteria for determining significance

Ongoing supervision of the significant banks is carried out by Joint Supervisory Teams (JSTs). Each significant bank has a dedicated JST, comprising staff of the ECB and the national supervisors.

Joint Supervisory Teams

Indirectly supervised banks

Banks that are not considered significant are known as "less significant" institutions. They continue to be supervised by their national supervisors, in close cooperation with the ECB.

At any time the ECB can decide to directly supervise any one of these banks to ensure that high supervisory standards are applied consistently.

Which countries participate?

All euro area countries participate automatically in European banking supervision.

Other EU countries that do not yet have the euro as their currency can choose to participate. To do so, their national supervisors enter into "close cooperation" with the ECB. Bulgaria and Croatia joined European banking supervision through close cooperation in October 2020.

ECB Decision governing the procedures for close cooperation

Cooperation with non-participating countries

For those EU countries that are not participating in European banking supervision, the ECB and the relevant national supervisors may set out in a memorandum of understanding how they will cooperate on supervisory matters.

Single resolution mechanism

The single resolution mechanism (SRM) is a central institution for bank resolution in the EU, and one of the pillars of the banking union.

Overview

Resolution is the orderly restructuring of a bank by a resolution authority when the bank is failing or likely to fail. This procedure ensures that a bank failure does not harm the broader economy or cause financial instability.

The single resolution mechanism (SRM) applies to banks covered by the single supervisory mechanism. It is the second pillar of the banking union.

If a bank fails despite stronger supervision, the SRM allows bank resolution to be managed effectively through

• a single resolution board
• a single resolution fund that is financed by the banking sector

The purpose of the SRM is to ensure an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy. 

The SRM regulation establishes the framework for the resolution of banks in EU countries participating in the banking union.

Single resolution board

The single resolution board, established by the SRM regulation, is a fully independent EU agency acting as the central resolution authority within the banking union. Together with the national resolution authorities of participating countries, it forms the SRM. 

The mission of the SRB is

• ensuring the orderly resolution of failing banks with minimum impact on the real economy and the public finances of banking union countries
•  managing the single resolution fund