The financial crisis highlighted the need for better regulation and supervision of the financial sector. Since 2010, the European Commission proposed over 30 sets of rules to ensure that all financial actors, products and markets are appropriately regulated and efficiently supervised.

In 2011, the crisis took a new turn with the euro area debt crisis: it highlighted the need for a deeper and more integrated approach to address the potentially vicious circle between banks and sovereigns. Following the commitment to a Banking Union taken by EU Heads of State or Government at the June 2012 European Council, the Eurogroup established the European Stability Mechanism (ESM) as a direct recapitalisation instrument. Moreover, in December 2012, the European Council agreed to a more integrated financial framework in the EU, where the key building blocks of the Banking Union would consist of the Single Supervisory Mechanism (SSM), Single Resolution Mechanism (SRM) and of the possibility to use the ESM to recapitalise banks directly.

In order to reflect the close interrelation between the various components of the Banking Union legislation, most importantly the Bank Recovery and Resolution Directive and the Deposit Guarantee Scheme Directive (DGSD), it is proposed that the operational framework will be finalised as soon as these legislative proposals have been finalised with the European Parliament.

The Single Supervisory Mechanism (SSM)

The SSM Regulation entered into force on 4 November 2013 and will be fully operational this year. The European Central Bank (ECB) is currently carrying out a comprehensive assessment of all banks which will be under its direct supervision. During the ECOFIN Council meeting last week, the ministers were briefed on the ECB preparations for taking up its supervisory tasks on 3 November. The ECB is about to launch the operational phase of an asset quality review as part of a comprehensive assessment of the banks which it will supervise directly. The review will be followed by a stress test exercise in the second half of this year in coordination with the European Banking Authority.

The SSM:

·         confers new supervision powers on the ECB for the significant banks of the euro area and the monitoring of the supervision by national supervisors on less significant banks;

·         ensures a more resilient, more transparent, and more efficient European banking sector through the coherent and consistent application of the single rulebook regulation;

·         allows for cross-border banks to continue to be active both within and outside member states participating in the SSM;

·         is open to all non-euro area member states;

·         establishes a governance structure of the ECB consisting of a separate Supervisory Board supported by a steering committee − the ECB governing Council.

The Single Resolution Mechanism (SRM)

In the Banking Union, bank supervision and resolution need to be exercised by the same level of authority and be backed by adequate funding arrangements to avoid tensions between the ECB and national resolution authorities over how to deal with banks in trouble and with fragmentation and competitive distortions across the Single Market.

The SRM consists of a Single Resolution Board and a Single Resolution Fund for the resolution of failing banks. In this way the costs of resolution will not come down on taxpayers through bank bailouts.

When discussing the issue with Meusac’s Core Group members, last September, the Permanent Secretary in the Ministry for Finance, Alfred Camilleri, explained that the SRM will increase confidence in banks and financial institutions. Moreover, last December, the ECOFIN Council reached a political agreement on the SRM regulation which should be finally agreed by co-legislators before the end of the mandate of the current European Parliament. Euro area ministers also decided to negotiate an intergovernmental agreement on the functioning of the single resolution fund by 1 March. The SRM regulation will enter into force on 1 January 2015.

The Minister for Finance, Prof. Edward Scicluna, called the agreement, “a European milestone decision”, and expressed his satisfaction that all member states agreed to this historic step forward in European coordination towards overcoming market fragmentation and injecting international confidence in the resilience of the EU’s financial sector.

Deposit Guarantee Scheme

So far it has not been envisaged to equip the banking union with a single supranational deposit guarantee scheme (DGS). The priority is to reach an agreement on a common network of national deposit guarantee schemes. Once agreed, the proposal on DGSs will ensure that every member state has a deposit guarantee fund which serves as a backstop and will allow a voluntary mechanism of mutual borrowing between the DGSs from different EU countries.

It is hoped that a fully functioning banking union will guarantee financial stability and eventually, a sustainable recovery in Europe. In the end, it must ensure that taxpayers do not have to make up for their banks’ mistakes.