The Banking Union in Europe
Summary and Keywords
The banking union is considered to be one of the main steps in economic integration in the European Union. Given the rather recent establishment of this policy, academic research on the banking union does not have a long lineage, yet it is an area of bourgeoning academic enquiry. There are three main “waves” of research on the banking union in political science, which have mostly proceeded in a chronological order. The first wave of scholarly work focused on the “road” to banking union, from the breaking out of the sovereign debt crisis in the euro area in 2010 to the agreement on the blueprint for the banking union in 2012, explaining why it was set up. The second wave of literature explained how the banking union was set up and took an “asymmetric” shape, whereby banking supervision was transferred to the European Central Bank (ECB); however, banking resolution partly remained at the national level, whereas other components of the banking union, namely, a common deposit guarantee scheme and a common fiscal backstop, were not set up. The third wave of research discussed the functioning of the banking union, its effects and defects. The banking union has slowly brought about significant changes in the banking systems of the member states of the euro area and in government–business relations in the banking sector, even though these effects have varied considerably across countries.
Keywords: banking union, European financial integration, banking regulation, banking supervision, banking resolution, banking systems, Euro area, European Central Bank (ECB), Economic and Monetary Union (EMU), European Union politics
The banking union is one of the most recent policy areas of the European Union (EU). After the establishment of the Economic and Monetary Union (EMU) and introduction of the single currency—the euro—the banking union can be regarded as a key step in the process of European economic integration. The banking union was a response of the EU to the sovereign debt crisis in the euro area, which in turn was mostly caused by the “incompleteness” of the EMU (Verdun, 1996, 2015). Indeed, the banking union, as initially envisaged, was intended to contribute to the completion of the EMU and was to be based on four pillars: single banking supervision, single banking resolution, a common deposit guarantee scheme, and a common fiscal backstop. Eventually, the first two components of the banking union were set up, but the last two components, which had mostly to do with risk sharing, were not. Hence, the banking union is “incomplete” and “asymmetric.”
Academic research on this topic does not have a long lineage because the establishment of the banking union is relatively recent. Yet the literature on the banking union is flourishing. There are three main “waves” of research on the banking union in political science, discussing the key questions addressed by various bodies of work, the theoretical approaches used, the explanans and explanandum, and the main findings. “Explaining the ‘Road’ to the Banking Union” examines the explanations concerning the “road” to the banking union, beginning from the peak of the sovereign debt crisis in the periphery of the euro area to the agreement on the blueprint for the banking union in 2012. “Explaining the Establishment of the Main Components of the Banking Union” discusses the research on the setting up of the main components of the banking union. “Functioning of the Banking Union and Its Effects” examines the functioning of the banking union, including its effects and defects. The “Conclusion” sums up the main themes that can be teased out from the literature reviewed.
Explaining the “Road” to the Banking Union
In political science, the first wave of research on the banking union aimed to answer three key questions: What were the main drivers of and obstacles to the banking union? Why and how was the banking union agreed on? The answers to these important questions have been sought by making use of some of the most well-established theories of European integration, namely, neofunctionalism, intergovernmentalism, constructivism, and institutionalism. Thus, early research regarded the banking union as the outcome, that is to say, the phenomenon to be explained by a variety of (potential) independent variables—which can broadly be grouped under the headings of institutions, interests, and ideas—at the national level and the EU level.
A neofunctionalist or supranational governance view of the establishment of the banking union has focused on explaining shifts in member states preferences on the banking union due to spillovers from previous economic integration (see, e.g., Niemann & Ioannou, 2015; Epstein & Rhodes, 2016) and/or has pointed out the pace-setting roles of EU supranational institutions, namely, the European Central Bank (ECB) and the European Commission (Bauer & Becker, 2014; De Rynck, 2015; Epstein & Rhodes, 2016; Dehousse, 2016), as well as the “collaborative leadership” between intergovernmental and supranational institutions, especially the presidency of the European Council and the Commission (Nielsen & Smeets, 2017). These studies have mainly argued that the banking union was the result of spillovers from previous integration, first and foremost, of the EMU and the single market in finance. Thus, the turning point was the establishment of the EMU, which supranationalized monetary policy, conducted by the ECB in the euro area, but left banking supervision and resolution at the national level. It is noteworthy that when the EMU was negotiated and eventually set up, there was some heated debate as to whether the ECB should be responsible (or not) for banking supervision in the euro area. Partly (but not exclusively) due to the opposition of German policymakers, the supervision of banks was left at the national level (Dyson & Featherstone, 1999). Moreover, the function of lender of last resort (LLR), which was previously performed by national central banks, was only implicitly transferred to the ECB, which on this issue maintained some “constructive ambiguity” (Chang, 2018).
Some authors have implicitly used a neo-functionalist explanation, arguing that the banking union was intended to address the “financial trilemma,” breaking the “vicious circle” between ailing banks and fiscally weak sovereigns (Pisani-Ferry, 2012). The trilemma, which was highlighted by the literature in economics, examined the interplay of financial stability, cross-border banking, and national financial policies, arguing that any two of the three objectives could be combined, but not all three: one had to give way (Schoenmaker, 2013). The establishment of the EMU had made the financial trilemma more acute and ultimately untenable in the euro area. The introduction of the euro and the Financial Services Action Plan substantially increased financial integration in the EU—especially cross-border banking in the euro area—but banking supervision and resolution remained at the national level. The international banking crisis was an external shock to financial stability of the euro area, but the member states no longer had all the instruments to deal effectively with crisis at the national level, nor had these instruments been set up at the EU/euro area level. The banking union was supposed to address this institutional shortcoming by transferring these policies from the national level to the euro area (to be precise, the banking union) level (Howarth & Quaglia, 2014). On the one hand, these functionalist dynamics contribute to explaining the rationale for the banking union. On the other hand, they do not shed light on the distinctive shape that the banking union took.
The vast majority of research investigating the establishment of the banking union has adopted explicitly or implicitly an intergovernmentalist approach (Donnelly, 2014; Fabbrini, 2013; Howarth & Quaglia, 2016a, 2016b; Schild, 2017; Schimmelfennig, 2015). There are various versions of intergovernmentalism; their common denominator is the focus on national interests and the decision-making power of national governments negotiating in intergovernmental fora. The most common version of intergovernmentalism, namely, liberal intergovernmentalism (Moravcsik, 1998) focuses on (a) preference formation based on domestic interests, impacted by interdependence; (b) intergovernmental bargaining based on power asymmetries; and (c) institutional choices that reflect the preferences of the member states, whereby some functions are delegated to supranational institutions in order to deal with the “commitment problems” experienced by the member states.
Intergovernmental accounts of the banking union have investigated the competing interests of the member states, which had to be reconciled in EU negotiations. This often resulted in convoluted compromises in the design of the banking union. Intergovernmentalist accounts have also considered the different bargaining power of the member states, generally focusing on the main member states, notably Germany and to a lesser extent France. French policymakers unsuccessfully pushed for the construction of massive support mechanisms able to purchase debt directly from euro area member states and engage in bank recapitalization. Similarly, policymakers in the countries of the euro area periphery hit the sovereign debt crisis sought EU/euro area financial support mechanisms that would enable them to deal with the crisis. In return for that, they were willing to accept the supranationalization of banking supervision. Thus, the interests of French and Southern European policymakers in the banking union stemmed from a desire to establish a kind of financial backstop to the euro area via a lender-of-last-resort-style support for banks, rather than governments per se.
German policymakers sought to establish clear limits to their financial assistance to ailing banks and governments in countries hit by the sovereign debt crisis. They also made clear that the acceptance of joint liabilities in the euro area should be preceded by joint controls through the supranationalization of banking supervision. Effectively, this debate on the banking union paralleled long-standing debates on euro area governance and the quest for solutions to the sovereign debt crisis (Howarth & Quaglia, 2013). The French-led coalition, which included Southern European countries, sought support mechanisms, stressing the importance of “solidarity.” The German-led coalition, which included Austria, the Netherlands, and Finland, sought reinforced fiscal policy commitments (sustainable member state budgets), stressing the need to avoid “moral hazard.” These different preferences among member states generated distributional conflicts that had to be reconciled through intergovernmental bargaining. The outcomes of the negotiations were the result of compromises between the different positions of the member states but were often closer to the preferences of the most powerful player, Germany, which had a “constrained veto power” (Bulmer, 2014; Bulmer & Paterson, 2013). Such power resulted from the size and stability of its economy and its banking system. It was, however, constrained because Germany, like the other euro area member states, had a clear interest in avoiding disruptions to the EMU and not breaking up the euro area.
A third approach that has been used to explain the establishment and the design of the banking union is constructivism. There are several variations of constructivism, but what they all have in common is the explanatory power assigned to ideas, defined as a set of causal beliefs concerning a certain policy area, rather than material (mostly economic) interests. Idea-based constructivist accounts contrast with the interest-based approach of intergovernmental explanations. Thus, constructivist approaches generally emphasize the importance of socialization in international or EU fora as a way to facilitate ideational convergence toward a certain EU project (in this instance, the banking union), or they focus on the instrumental role of ideas, for example, “policy narratives” (Radaelli, 1999). Schäfer (2016, 2017) combines the “constitutive and strategic role of ideas” in the making of the banking union, arguing that “ordoliberal ideas” were constitutive for German preferences. At the same time, ideas were used as “strategic resources by the German government’s opponents in order to extract concessions from Germany” (Schäfer, 2016, p. 962, see also 2017). By contrast, Matthijs (2016) stresses the “perverse logic” of German ordo-liberal ideas in worsening the sovereign debt crisis, arguing that German policymakers “undercut their own stated goals” and made matters worse by sticking to ordo-liberalism, even in the light of clear evidence that the policies they inspire were not working. Thus, there are different ideas about ideas in the making of the banking union.
Works that stress the role of supranational actors in the establishment of the banking union often point out the importance of institutions and ideas. Thus, Carstensen and Schmidt (2018) argue that supranational actors were able to exert “institutional and ideational power” in the second stage of the sovereign debt crisis (i.e., from 2012 onward), which led to the establishment of the banking union. Other authors draw attention to the constraining (or enabling) functions of institutions (Glöckler, Lindner, & Salines, 2016), as well as the path dependency created by previous “differentiated integration” concerning the EMU (Schimmelfennig, 2016) and the “incompleteness” (or “asymmetry”) of the EMU (Verdun, 1996, 2015). Finally, some authors have combined various theories, such as liberal intergovernmentalism and neofunctionalism, in order to account for the establishment of the banking union (Boerzel & Risse, 2018; Quaglia & Spendzharova, 2017). For example, Jones, Kelemen, and Meunier (2016) used a two-step approach, arguing that negative spillovers from previous incomplete integration in the EMU triggered the sovereign debt crisis. This was followed by intergovernmental negotiations, which paved the way to the establishment of the banking union.
All in all, the agreement on the banking union can be seen as a response to the asymmetric design of the EMU (a monetary union with a limited form of economic union) and to the fragmentation of the single financial market. It can also be seen as a crisis-driven attempt to address several important issues that were sidestepped or papered over during the negotiations leading to the Maastricht Treaty—principally the allocation of supervisory responsibilities to the ECB and the creation of a fiscal backstop in the eurozone (for more details, see Dyson & Featherstone, 1999). Other issues (notably, the need for a single rule book and the harmonization of deposit guarantee schemes) stemmed from the incomplete nature of the single financial market—despite its heralded relaunch in the early 2000s. The limited integration of financial services markets (and, notably, banking markets), even after more than a decade of the EMU, was a major weakness in the single market. The global financial crisis first and the sovereign debt crisis later fragmented the single financial market: banks reduced their cross-border activities and the cost of money (e.g. the interest rate paid on bank loans) also varied considerably across the member states of the euro area. In turn, this disrupted the conduct of the single monetary policy of the ECB. The setting up of the banking union was a direct response to market fragmentation and thus should be seen as much in terms of reinforcing the single market as stabilizing banks and the EMU (Howarth & Quaglia, 2013).
By combining the main findings of this first wave of research on the banking union, one gets a good understanding of the factors and dynamics at play in the making of the project—which bear considerable similarities to the making of the EMU. The main drivers toward the banking union were spillovers of various types from previous integration, first and foremost the EMU, but also the single market in finance. This was combined with the entrepreneurship of supranational actors, such as the Commission and the ECB. Finally, the banking union was advocated by policymakers in the member states hit by (or most exposed to) the sovereign debt crisis in the euro area. The main obstacle to be overcome in the construction of the banking union was the initial reluctance of German policymakers, which had considerable bargaining power, given the size of the German economy and its sound economic and fiscal position. However, Germany was internally divided on the banking union because this country has a pillared banking system whereby the different pillars compete with each other, and had different preferences concerning the establishment of the banking union (Schild, 2017). As far as the non–euro area member states are concerned, the high levels of foreign ownership in the Central and Eastern European countries (Spendzharova, 2014; Mérő & Piroska, 2018) and the high level of domestic bank internationalization in the United Kingdom (Howarth & Quaglia, 2016b) explain why governments in these countries were unwilling to join the banking union and preferred instead to retain national autonomy in banking supervision.
Explaining the Establishment of the Main Components of the Banking Union
The second stream of literature on the banking union examined the politics of setting up its main components. To be sure, part of this literature overlaps with that relating to the path to the banking union, but it also includes works of legal scholars and economists, as well as political scientists, that have “zoomed in” on the negotiations of specific aspects of the banking union. Moreover, some political economy approaches have investigated the preferences of EU member states on the main components of the banking union—namely, supervision, resolution, deposit guarantee, and financial backstop.
In June 2012, the president of the European Council, the president of the Eurogroup, the president of the Commission, and the president of the ECB presented an interim report titled “Towards a Genuine Economic and Monetary Union.” The Van Rompuy (2012) report, which was also known as the “Four Presidents Report,” proposed what later became known as the banking union. The European Council and the euro summit subsequently endorsed the banking union project in June 2012 (Euro Summit, 2012). Subsequently, the banking union was established in a timely fashion between 2012 and 2015.
The first component of the banking union to be set up was the Single Supervisory Mechanism (SSM) (Alexander, 2015; Ferran & Babis, 2013; Glöckler et al., 2016; Veron, 2012). The final agreement reached at the December 2012 European Council foresaw that the ECB would be “responsible for the overall effective functioning of the SSM” and would have “direct oversight of the euro area banks” (ECB, 2014b). This supervision, however, would be “differentiated,” and the ECB would carry it out in “close cooperation with national supervisory authorities.” The regulation establishing the SSM also permitted the ECB to step in, if necessary, and supervise any of the 6000 banks in the euro area. The SSM applied only to the euro area member states and to the non–euro area member states that decide to join the banking union.
The SSM eventually agreed on involved a compromise on the distribution of supervisory power between the ECB and the national competent authorities. Direct ECB supervision—through joint supervisory teams—was to cover only those banks with assets exceeding €30 billion or those whose asset represented at least 20% of their home country’s annual gross domestic product (GDP). The thousands of smaller, so-called “less significant” banks headquartered in the euro area would continue to be under the direct supervision of the national competent authorities, but according to increasingly harmonized rules and practices. This compromise of two-level supervision reflected above all the demands of the German government, which opposed transferring supervisory responsibilities for the country’s regional public savings banks (Sparkassen) and cooperatives to the ECB (Howarth & Quaglia, 2016b).
In July 2013, the Commission proposed the establishment of the Single Resolution Mechanism (SRM), designed to complement the SSM (Alexander, 2015; Asimakopoulos, 2018; Božina Beroš, 2017; Veron & Wolf, 2013). Most of the intergovernmental negotiations concerned the decision-making process in the SSM and the establishment of the Single Resolution Fund (SRF) financed by bank levies raised at the national level. The Commission, supported by French, Spanish, and Italian policymakers, wanted to be given the final power to decide whether to place a bank into resolution and how to determine the application of resolution tools. However, German policymakers argued that the Single Resolution Board (SRB) should be given this power and insisted on setting up the SRF through an intergovernmental agreement among the participating member states (Schild, 2017). Different material interests, discussed in “Explaining the ‘Road’ to the Banking Union,” underpinned these national positions.
Supranational actors, namely the Commission and the ECB, pushed for a high degree of supranationalization of the would-be SRM. In its opinion, the ECB (2013) pointed out that the SRB should be, from the start, a single “strong and independent” body, thus directly challenging the German position that the SRM should begin as a network of national authorities. Along similar lines, Michel Barnier, the EU Commissioner responsible for financial services, pointed out that “we are building . . . a single system and not a multi-store intergovernmental network” (cited in Howarth & Quaglia, 2014).
In March 2014, an intergovernmental agreement was reached on the establishment of the SRM. As advocated by German policymakers, the SRB would be responsible for the planning and resolution of cross-border banks and those directly supervised by the ECB, while national resolution authorities would be responsible for all other banks, except if a bank required access to the SRF (Božina Beroš, 2017). Moreover, the SRF, financed by bank levies raised at national level, would initially consist of national compartments that would be gradually merged over eight years (Alexander, 2015). Asimakopoulos (2018) argues that the SRF embodies all the controversial characteristics of the banking union, given its partly intergovernmental, partly supranational character. The SRM regulation was adopted in conjunction with the Bank Recovery and Resolution Directive (BRRD), which harmonized resolution instruments and powers in the EU. The BRRD and the SRM regulation introduced a new instrument in bank resolution, the bail-in, which reduced substantially the need for public funding to bail out banks (Nielsen & Smeets, 2017). Thus, the SRM would be “fiscally neutral” (Eurogroup & Ecofin, 2013, p. 1). German policymakers, supported by the Dutch, Austrian, and Finnish policymakers, insisted on an earlier entry into force of the bail-in than the originally envisaged date in 2018 (Quaglia & Spendzharova, 2017). The start date was eventually moved forward to 2016. The instrument of the bail-in enables banks to withstand financial stress by imposing losses on creditors (bail-in), without resorting to state-funded recapitalization (bailout).
The missing component of the banking union was what later became to be known as the European Deposit Insurance Scheme (EDIS) (see Donnelly, 2014; Gros & Schoenmaker, 2014; Howarth & Quaglia, 2018; Mayes, 2017). In June 2012, the interim Van Rompuy (“Four Presidents”) report mentioned the need to set up an EDIS. Reportedly, the Commission had prepared a draft proposing a new agency, the European Deposit Insurance and Resolution Authority (EDIRA), which would control a new European Deposit Guarantee and Resolution Fund. Due to German opposition, the proposal for the EDIRA was removed and the final Commission document, “A Roadmap Towards Banking Union” (European Commission, 2012). Hence, the final Van Rompuy report issued in December 2012 only made reference to the “agreement on the harmonisation of national resolution and deposit guarantee frameworks, ensuring appropriate funding from the financial industry” (Van Rompuy, 2012, p. 4). German policymakers criticized the EDIS as an unacceptable step toward debt mutualization. By contrast, policymakers in France and in the euro area periphery regarded the EDIS as the final pillar of the banking union, necessary to sever the doom loop between banks and sovereigns. The ECB regarded the EDIS as an important component of the banking union, but one that could be implemented at a later date (Howarth & Quaglia, 2018).
The issue came back on the policy agenda in June 2015, when supranational actors—including ECB president Mario Draghi and Commission president Jean-Claude Juncker—endorsed the creation of the EDIS in the so-called “Five Presidents’ Report” on the future of the euro (Juncker, 2015). In the autumn of 2015, the Commission proposed the EDIS for bank deposits in the euro area as “the third pillar of the banking union” (European Commission, 2015). The Commission proposal would, as a first step, involve the establishment of a mandatory “reinsurance” scheme that would “contribute under certain conditions when national deposit guarantee schemes are called upon,” thus in effect acting as a backstop to national deposit guarantee schemes (European Commission, 2015). This initiative took place despite explicit German opposition. As in the case of the creation of the SRF, the intergovernmental discussion on the creation of an EDIS pitted the interests of the countries expected to make net contributions to common rescue funds—either from taxpayers or from banks—against the interest of the countries that expected to be the principal recipients (Donnelly, 2018b).
Finally, the credibility of the SRM/SRF and the EDIS was linked to the possibility of accessing a common fiscal backstop. Given unanimity rules on the use of the European Stability Mechanism (ESM), German policymakers enjoyed a veto on any decision to engage in direct bank recapitalization. Under the rules established for the direct recapitalization of banks, euro area member states agreed that a bank’s creditors should absorb “appropriate” losses before ESM funds could be accessed. These appropriate losses were defined by the BRRD’s rules on the bail-in. Moreover, ESM rules required a bank’s home government to contribute at least 20% of the recapitalization (initially) and then 10% from 2017. German policymakers—joined by the Austrians, Dutch, and Finns—insisted that ESM funds could not be used to cover legacy problems. Hence, the fiscal backstop did not materialize (Howarth & Quaglia, 2016b). Asimakopoulos (2018) argues that “the interrelation between the SRM, the SRF and the ESM, allows leading economies, including Germany, to control the resolution framework both before and after crisis.”
Overall, the banking union was set up in a timely fashion between 2012 and 2014. However, it was incomplete and asymmetric in three main respects. First, member states’ governments retained their vetoes on the mutualization of national funds and had an important say on the use of resolution funds in the SRM. A rather “complex” compromise was reached concerning the resolution process in the SRB. Moreover, resolution mostly remained a national matter. De facto, the SRB has so far resolved only one bank. Second, the EDIS was not set up. Third, no common fiscal backstop was established. Most of the intergovernmental negotiations on the core components of the banking union basically boiled down to distributional conflicts on two dimensions: the centralization of decision-making and the allocation of costs via risk sharing in the banking union. The competing interests were those of the countries expected to be contributors to common rescue funds and those of the countries that expected to be the principal recipients. Thus, compromises between the two coalitions were sought during the negotiations. The institutional design eventually set up for the banking union was closer to the preferences of the German led-coalition as far as risk sharing is concerned, whereas German policymakers had to make concessions concerning the transfer of decision-making to the EU/euro area level (Skuodis, 2017).
Functioning of the Banking Union and Its Effects
Once the banking union was established, researchers in political science asked a new set of questions: How did the banking union work, and why? What were the effects of the banking union? How did it affect the member states, especially their banking systems? This “third-generation” research on the banking union has considered it as the explanans of a variety of outcomes at the national level in the member states, as well as a factor triggering new EU policy developments. Given the relatively recent establishment of the banking union, this literature is embryonic.
In 2014, the SSM began functioning. At the center of the SSM there was the ECB, which was an independent, well-resourced institution with proven capacity to take bold (sometimes, politically controversial) decisions (Verdun, 2017). Within the SSM, the ECB had clearly assigned regulatory and supervisory competences, granted by the Maastricht Treaty and the SSM legislation. It also had substantial financial and human resources to deploy. In 2014, the ECB published a list of 128 banks subject to direct ECB supervision (the so-called “significant banks”), which accounted for approximately 80% of the assets of euro area banks. In the same year, the ECB published the SSM Supervisory Manual and also the Guide to Banking Supervision (ECB, 2014a). As a way to deal with the “legacy problems” pointed out by the German-led coalition, the ECB undertook a comprehensive assessment of the banks subject to its direct supervision (ECB, 2014b). The comprehensive assessment consisted of the ECB’s assets quality review (AQR) and the stress tests of the European Banking Authority (EBA) (Schoenmaker & Véron, 2016). The AQR reviewed more than 800 portfolios, amounting to approximately 57% of the risk-weighted assets of the 128 banks examined. Crucially, the AQR significantly improved the transparency and comparability of bank data across the euro area by harmonizing the definition of non-performing loans and uncovering hidden losses. In doing so, the ECB found massive shortfalls in the loans that banks and national regulators classified as non-performing (i.e., bad). This figure amounted to 15% more than the total previously announced by the national competent authorities (Gren, Howarth, & Quaglia, 2015).
Although the problems of ailing banks resulted from past legacies and would have existed without the banking union, the ECB-led supervision in the SSM exposed these banking problems more starkly. A clear example was the ECB’s comprehensive assessment, which highlighted that several banks suffered from non-performing loans. Whereas in the past, national supervisory forbearance was a common practice, this was no longer possible under the supervision of the ECB in the SSM. In certain cases, such as the Monte dei Paschi di Siena in Italy, the Novo Banco in Portugal, and the Banco Popular in Spain, the viability of the banks was at risk. Thus, the harmonization of banking supervision in the banking union—which meant stricter supervision—primarily reflected the interests of the German-led coalition that worried about legacy problems and the possibility of having to bail out banks in other countries. At the same time, in a path-dependent fashion, it strongly constrained the room for maneuvering of national banking supervisory authorities in the euro area periphery.
Besides promoting the harmonization of supervision in the euro area, the SSM (and within it, the ECB) also promoted the harmonization of regulation, to be precise, the EU banking rulebook, so as to secure a level playing field in the euro area. The process started by focusing on significant banks and subsequently extended to less significant banks. In 2015, the ECB issued a (binding) regulation concerning the exercise of so-called “general options” and national discretions vis-à-vis significant banks directly supervised by the ECB. In 2016, the ECB issued a (non-binding) guideline on the exercise of options and national discretions on a “case-by-case” basis and a (non-binding) guidance for the assessment of non-performing loans for significant banks. In 2017, the ECB began working on regulatory harmonization concerning less significant banks, issuing a (non-binding) recommendation on the exercise of options and national discretions (for a detailed analysis, see Gren, 2017).
In 2015, the SRB was set up as an EU agency, and the SRM began functioning. The SRM had a rather weak institutional setup compared to the SSM. It did not have a well-established supranational institution, such as the ECB, as its center. Unlike the ECB, the SRB was an agency, which limited its independence, decision-making capacity, and resources. The SRF was in the process of being built, and at any rate several policymakers criticized the limited amount of funding that would be made available subject to a host of conditions. The use of the ESM as a backstop during the building up of the SRF never came to fruition, even though the French-led coalition repeatedly raised this issue. For example, French and Italian policymakers issued a joint document in April 2016, advocating the establishment of a common backstop so as to sever “doom loop” bank sovereigns (Gaurascio, 2016). Since its inception, the SRB has intervened to resolve only one bank, despite the fact that there were many ailing banks in the euro area periphery. In certain cases, notably in the case of ailing Italian banks, the Italian authorities and the SRB were keen for the SRB not to get directly involved.
The SRM and the BRRD were supposed to harmonize bank resolution in the banking union, but this happened only to a limited extent. The institutional model chosen for the SRM meant that resolution partly remained a national competence for small domestic banks. For banks under direct ECB supervision, as well as cross-border banks, resolution was to be managed by the SRB through a convoluted decision-making process (see Kudrna, 2016) and without the backing of a substantial SRF. Consequently, there was considerable national variation in the way in which the national authorities dealt with ailing banks in the banking union, in particular concerning the important question of “who pays” (Mayes, 2018).
All in all, the domestic effects of the banking union mostly concern the configuration of national banking systems. Since the inception of the banking union, the levels of banks’ capitalization have starkly increased and the level of banks’ non-performing loans have been reduced in the euro area (albeit, this also reflects a more general trend across the EU). Furthermore, several banks were closed down, or they recovered from unhealthy financial conditions via preventive state-led recapitalization. However, the most important changes, from a political science perspective, involve business–government relations, meaning the relations between banks and their national authorities (banking supervisors, central banks, and treasury ministries). In this respect, the institutional design of the banking union seems to suffer from a “disjuncture.” Some legal competences and powers no longer belong to the national authorities; they have been transferred to different authorities at the euro area level, and these authorities sometimes act in a poorly coordinated way.
In a nutshell, the ECB decides whether a bank under its direct supervision is “failing or likely to fail.” The SRB in the SRM is in charge of resolving banks whose resolution is in the “public interest.” Other failing banks are liquidated by the national authorities, according to national law. The Commission monitors the use of state aid and its effects on competition, as well as the application of rules on private sector burden sharing. Yet, the political responsibility and accountability to deal with ailing banks remains at the national level, and so does the fiscal capacity to bail out banks, subject to EU rules. Timely coordination concerning the management of ailing banks is already difficult at the national level because different authorities with different incentives are involved. The process is even more difficult when competences, powers, responsibility, and accountability are split across levels of governance. This disjuncture generates a power vacuum: the national authorities are weaker—they have fewer powers and competences—following the establishment of the banking union. Yet, the EU authorities have not been sufficiently strengthened to compensate for the competences lost by the public authorities at the national level.
How to interpret, theoretically, the functioning of the banking union? The literature has not yet engaged in this kind of assessment. However, by making reference to the theoretical approaches used to explain the agreement on the banking union, one could argue that the intergovernmental institutional choices made when the banking union was established, which mostly reflected the preferences and power of the German-led coalition, generated path dependency, which to a large extent reflected the interests of the prevailing coalition and penalized those of the demandeur countries. German policymakers argued that a larger SRF, a common deposit guarantee scheme, and a common backstop were not necessary given the bail-in rules, which were supposed to reduce the need for common rescue funds—either from taxpayers or banks—to deal with ailing banks. However, the bail-in was often politically controversial and judicially contested, especially if retail investors were affected, as in the case of Italy; or creditors were selectively bailed in, as in Portugal; or there was extensive bail-in of creditors, as in Spain, whereby numerous lawsuits were filed against the national authorities and the SRB. Moreover, the bail-in of bank creditors could have contagion effects in national banking systems in the euro area periphery, where the debt of ailing banks was mostly owned by other financial institutions and in some cases by retail investors in the same country. The most penalized by an incomplete banking union and its asymmetric effects have been countries in the periphery of the euro area, which had several ailing banks as well as banking systems in a bad shape. Hence, a coalition led by policymakers in France, Italy, and Spain repeatedly called for the completion of the banking union, with some support from the Commission and the ECB. Nonetheless, there has been an impasse in the negotiations on the EDIS and the common financial backstop, which Donnelly (2018a) explains as the result of competing advocacy coalitions: “Germany and the Netherlands have pushed for wide-ranging risk reduction measures: that go to the core of financial practices in southern Europe, while Italy has pushed for greater public backstops and state aid within the EMU.”
The research agenda on the banking union in political science is building up, highlighting the importance of this policy area for the EU. The literature has mostly been developed in “waves,” even though it is fair to say that the account provided in this article, especially as concerns the division into periods, has partly been streamlined for ease of analysis and stylistic purposes. Research on the banking union has considered this project first as the explanandum and then as the explanans, producing effects on the member states and the EU system. Several different theoretical approaches—notably, supranational governance, intergovernmentalism, constructivism, and institutionalism—have been used to shed light on a variety of research questions, which have been analyzed by considering the role and the interplay of institutions, interests, and ideas. There are also interesting similarities concerning the academic research and policy debate on the banking union and those on the EMU, including the quest for institutional symmetry and for the completion of these projects.
Research on the banking union in political science has often been interdisciplinary or, at the very least, has spoken to and drawn on the literature on the banking union in law and economics. From a methodological point of view, research on the banking union in political science has mostly been qualitative, making use of process tracing and case studies (e.g., on each of the core components of the banking union). However, sometimes this literature has not explicitly adopted a research design, and consequently it has been somewhat descriptive or narrative rather than explanatory. Empirically, the role of some countries, notably Germany and to a lesser degree France, have been more extensively studied than others.
Overall, some key themes can be teased out. To begin with, the banking union, like the EMU, seems to be a textbook example of the so-called “theory of the bicycle” in the EU, whereby the EU has to move forward in order not to fall apart. Thus, there was the economic and political need to move forward in the completion of the EMU, in order to deal with the sovereign debt crisis in the euro area. This goal was partly achieved: the crisis was not solved, but its intensity decreased. In order to protect financial stability in the EMU and address the fragmentation of the single market in finance (especially in the banking sector of the euro area), euro area policymakers decided to promote the completion of the EMU by setting up the banking union, transferring banking supervision and resolution (only in part) to the euro area level. These functional dynamics and path dependency were often exploited by skillful policy entrepreneurs, such as the Commission and, later on, the ECB. However, different member states had different preferences on the banking union, which was left incomplete, whereby a common deposit guarantee scheme and the common fiscal backstop were not set up. In turn, this asymmetric configuration of the banking union caused asymmetric effects across and within the member states, which also partly explains why the sovereign debt crisis has lingered on.
The second theme concerns the persisting importance of the member states, their interests, ideas, and bargaining power, in an area which has been supranationalized to a large extent (Dehousse, 2016) but which still requires the consent of the national governments of member states (at least, those of the bigger countries) in order to take major steps forward. In turn, the interests of the member states on banking union–related matters need to be decomposed by looking, for example, at the configuration of national banking systems (Howarth & Quaglia, 2016b). Ideas, in particular ordo-liberal ideas, also played an important role in the design and functioning of the banking union.
Last but not least, domestic politics was also important in determining what was acceptable (or otherwise) by the various member states, especially in Germany, where public opinion was hostile toward any form of fiscal transfer in the banking union. Domestic politics also explains why the “adjustment” to the banking union was difficult and halfhearted in Southern Europe, especially in Italy. Unlike in the construction of the EMU, when policymakers in several EU member states, with the exception of Germany, could rely on the “permissive consensus” of public opinion when the banking union was set up, that permissive consensus was no longer available. Rather, political contestation of the EMU, and more generally of the EU, was on the rise. Moreover, the resolution of banks is a politically salient issue in all countries because taxpayer money is at stake in cases of bailouts, and retail investors can suffer losses in the case of bail-ins.
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