EU Banking Union: What it is and What it is Not.
A summary of the European multilevel bank regulatory structure
by Arturo Pallardó (@bankingunion_eu) & Christopher Gandrud (@ChrisGandrud) | 26.02.2016

The health of the European banking system has come back into the media spotlight. The recent fall in bank shares; the creation of the Italian “bad bank”; and Britain’s demands to shield its banks from rules governing the euro region; suggest that the debate on the design and functioning of the European banking regulatory architecture will be on the table in the following months.

Given the complex and evolving nature of European banking regulation, there is much confusion about what has already been established and what plans are being discussed. We hope to clarify the current and proposed state of the European bank regulatory architecture. We differentiate which rules and institutions form the so-called “banking union” and which rules are part of the more general EU single market for financial services.

Relevant banking rules and institutions that apply to:

All EU Member States Rules: Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR); Bank Recovery and Resolution Directive (BRRD); Deposit Guarantee Scheme Directive (DGSD);
Institutions: European System of Financial Supervision (ESFS), including the European Banking Authority (EBA) and European Systemic Risk Board (ESRB)
Banking Union Member States Rules: Single Supervisory Mechanism Regulation; Single Resolution Mechanism Regulation; Intergovernmental Agreement (IGA) on the Transfer and Mutualization of Contributions to the Single Resolution Fund
Insitutions: ECB and NCAs (SSM); SRB and NCAs (SRM)
EEA/EFTA The majority of relevant EU Single Market legislation applying to all EU members in the area of financial services has been adopted in the EEA agreement. However, the following important legislation has NOT been incorporated yet (although they are expected to be incorporated soon): EU Regulations on the European Supervisory Authorities (including the EBA); BRRD; and the last revisions of CRD/CRR and DGSD.
Switzerland Bilateral agreements with the EU (there is one small bilateral agreement with Switzerland in financial services, specifically on non-life insurance)

Rules and Institutions Applying to All EU Member States

There is a set of financial legislation known as the “Single Rulebook” that applies to all 28 EU member states. The idea behind this term, which took shape in the De Larosiere Report, relates to the harmonisation and furthering of the single market with the aim of ensuring a level playing field between financial institutions. However, the single rulebook is a political rather than a legal concept and comprises a variety of specific acts ranging from secondary legislation (regulations and directives) to technical standards.

Although the substance of this body of law touches different parts of the financial field, three of the most important single-rulebook pieces are directly related to banking. These are the Capital Requirements Directive IV (CRD IV) and the Capital Requirements Regulation (CRR), the Bank Recovery and Resolution Directive (BRRD) and the Deposit Guarantee Scheme Directive (DGSD), which lay down capital requirements for banks and create regulation to the prevention and management bank failures, including a minimum level of protection for depositors.

There are also several pan-EU institutions that constitute the European System of Financial Supervision (ESFS), which is responsible for ensuring supervision of the whole Union’s financial system. The ESFS includes bodies such as the European Banking Authority, whose mandate is to produce a number of Binding Technical Standards (BTS) for the implementation of the CRD IV package and the BRRD. It also includes the European Systemic Risk Board (ESRB), which is responsible for the macro-prudential oversight of the financial system within the Union.

Rules and Institutions Applying to “Banking Union” Member States

Apart from EU-wide rules and institutions, there is a set of legislation and institutional arrangements known as banking union that currently applies only to the 19 euro-area members. It has three pillars:

The first pillar is the Single Supervisory Mechanism (SSM) which was established by the SSM Regulation. Under the SSM framework, the European Central Bank became the main supervisory authority for the member states participating in the banking union, although the supervisory tasks are performed in close cooperation with the National Competent Authorities (NCAs).

The second pillar is the Single Resolution Mechanism (SRM), which in turn is comprised of the Single Resolution Board (SRB) and the NCAs of the banking-union member states. Both the SRB (an independent EU agency) and its resolution fund, known as the Single Resolution Fund (SRF), were established by the Single Resolution Mechanism Regulation. However, the details of how the SFR is funded are arranged by the Intergovernmental Agreement (IGA) on the Transfer and Mutualization of Contributions to the Single Resolution Fund.

The third pillar, known as the European Deposit Insurance Scheme (EDIS), is still under construction. It would go further than the deposit insurance directive, which only sets minimum national deposit insurance requirements, by creating a new banking union-wide deposit insurance scheme. Even though, the Commission introduced a proposal for the scheme in November 2015, there are some member state policy-makers opposing it, notably in Germany.

Rules and Institutions Applying to EEA/EFTA Members

There is another group of countries outside of the EU that is subject to a set of EU banking legislation. The European Free Trade Association (EFTA), an intergovernmental organisation set up for the promotion of free trade and economic integration, is composed of Switzerland, Iceland, Liechtenstein and Norway. Whereas Switzerland participates in the European Union's single market through bilateral agreements, the other three EFTA countries together with the rest of EU Member States form the European Economic Area (EEA) through the Agreement on the European Economic Area (EEA). The EEA joint committee has to decide whether a specific piece of EU legislation should be adopted into the EEA treaty, and therefore adopted by the three EFTA countries participating in it (even though specific amendments can be made).

That is why the non-EU countries Norway, Liechtenstein and Iceland are transposing, for instance, the BRRD and DGSD into national law (although these legislative acts have not been yet incorporated to the EEA agreement, they are expected to be included soon). Because Switzerland does not participate in the EEA, it does not have to implement the EU financial services legislation (however it has decided to unilaterally introduce a resolution regime similar to the BRRD).

Not every piece of EU financial legislation has been adopted in the EEA Agreement. For example, the negotiations for adopting the regulation establishing the EBA have not concluded yet since some EEA/EFTA countries expressed their concern over the consequences of being bound by an external authority. For more information on this issue see this, this, and this.


This complex mix of legislation and institutions naturally can create confusion. Here are some frequently asked questions:

1) Do non-euro area members participate in the banking union?

Out of the 9 non-euro area members, 7 members (Bulgaria, Croatia, Czech Republic, Sweden, Hungary, Poland, Romania) are obliged to join the eurozone and so also the banking union once convergence criteria are met. However, non-euro area countries can join by establishing a close cooperation agreement with the ECB (see "European banking union: should the ‘outs’ join in?"). The two non-euro area members with an opt-out of the euro (Denmark and United Kingdom) also have the possibility of joining the banking union without joining the euro.

2) How do national regulators interact with the Single Supervisory Mechanism and the Single Resolution Mechanism?

In respect to supervision, both the ECB and the National Competent Authorities (NCA) form the SSM. Based on different criteria, the ECB directly supervises the ‘significant banks’ of the banking union participant countries whereas the ‘Less significant’ banks continue to be supervised by their national supervisors, in close cooperation with the ECB. However, the ECB is the license-granting authority for all banks including the less significant ones. Only “day-to-day supervision” is delegated to NCAs. Regarding resolution powers, both the SRB and the NCAs are part of the SRM. However, the decision on the resolution schemes is carried out by the SRB whereas the execution of such resolution is done by the NCAs.

3) Is the BRRD part of the banking union?

The BRRD provides common rules for dealing with failing banks, and it is applied across the whole EU. However, this piece of legislation cannot be considered part of the banking union. Its initial version was published in early June 2012, several weeks before the banking union agreement, following months of consultations. For countries outside of the banking union, these rules are implemented by national authorities. As explained in the previous paragraph, for countries in the banking union, the SRB decides on resolution schemes whereas the execution of such resolution is done by the NCAs.

4) How are the Deposit Guarantee Scheme Directive and European Deposit Insurance Scheme related?

The original Directive on Deposit Guarantee Schemes was adopted in 1994 in order to promote depositors’ confidence in the banking system through a minimum harmonization of national deposit schemes. Because of the financial crisis, the directive has been revised on two occasions since 2008. Firstly, the Directive of March 2009 required Member States to increase coverage of their DGS up to € 100 000. A second amendment was adopted in 2014 in order to ensure that DGS will be able to fulfil their obligations towards depositors, and faster access to deposits after a bank failure will stabilise the confidence of depositors and ensure financial stability. The implementation and, importantly, funding of each scheme remains with each member state. In contrast, the European Deposit Insurance Scheme would be a banking union-wide institution pooling funding from banks across the banking union. Though, at present, it is just an EU Commission’s proposal that aims to create a single European deposit scheme for the euro area members.

5) What is the difference between the EU-wide stress tests and the Asset Quality Review?

SSM authorities (the ECB together with the national supervisors) carry out financial health checks of the banks they supervise directly. These checks are known as Comprehensive Assessments, which are composed of two pillars: the Asset Quality Review (AQR) and Stress Tests. Covering only banking union members, the AQR focuses on the resilience of banks’ balance sheets through an assessment of data quality, asset valuations, classifications of non-performing asset exposures, collateral valuation and provisions. However, even though the stress tests are also part of the SSM comprehensive assessment, their scopes go beyond the banking union framework. Being coordinated by the EBA in cooperation with SSM authorities and covering euro and non-euro area members, these tests are a forward-looking view of banks’ shock-absorption capacity under stress.

6) Why is there an Intergovernmental Agreement for the Single Resolution Fund?

The SRM Regulation establishes the Single Resolution Board and the Single Resolution Fund. In the initial phase, the SRF is composed of national compartment funds. National authorities from participant member states will collect contributions from banks and will transfer them to these national compartments in a transitional period of 8 years. This mutualization of financial resources is regulated by an Intergovernmental Agreement (IGA) in order to avoid legal challenges that might derive from it.

Moreover, the IGA envisages the potential participation (and contribution to the Fund) of the non-euro area Member States. This is why the agreement was signed by 26 EU member states (all except Sweden and the United Kingdom), although it only has been ratified by euro area members as parts in the SRM.

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