Opinions Banking Union Eurozone

The failed attempt at a banking union

A critical analysis of the implementation of a banking union by Carsten Schneider


Carsten Frenzl


The hard-won agreement over joint bank monitoring was mistrusted from the moment it was put into force. The set of rules laid out is porous due to the many exceptions it allows. A commentary piece by Carsten Schneider.


The past few months have put the European banking union to the test. We all remember: Between 2008 and 2015 EU Member States provided 747 billion euros to save banks from collapsing and a further 1.19 trillion euros in the form of guarantees. Some countries, in particular Ireland, stretched their budget to such a point, that in some places a crisis of government debt grew out of the crisis of the banks.

In order to break out of the state-bank nexus, heads of states and governments agreed on a three tier based banking union in June 2012, which was implemented in May 2014. The first tier, the European Banking Authority (EBA), assumed its role in 2014 with the first European bank stress test, which brought to light amongst other things considerable capital shortfalls. The Single Resolution Mechanism (SRM) alongside the Bank Recovery and Resolution Directive (BRRD), as the second tier, aim to stop any further bank losses being socialised in the future.

Bail-in rather than bail-out were the magic words. In the place of public handouts more proprietors and creditors are called upon to pay up in the case of the liquidation of a bank. The third tier remains incomplete. Instead of a general deposit guarantee, which many rejected as a communitisation of bank losses, the Deposit Guarantee Scheme Directive (DGSD) harmonised national deposit protection funds. The country’s banks had to make provisional payments into these funds. This three-way bank regulation would lead to financial stability and stop the passing on of bank losses to the general public, that was the hope.

This hope was put to the test over the course of the past two months. The Spanish Banco Popular proved to be the first successful case at the start of June.The large Spanish bank Santander took over the Banco Popular for the symbolic price of one euro. In the case of bank failure two criteria must be fulfilled in order to call upon the funds which accompany the settlement mechanism: the recognition of insolvency as well as the systematic importance of an institute by the European banking regulator (SSM). When both criteria are met, access to EU money is granted.

Yet three weeks after the successful general test three Italian banks demonstrated that exceptions prove the rule. Firstly, the Commission approved a ‘preventative recapitalisation’ to the sum of 5.4 billion euros from the Italian state budget for the world’s oldest bank still in existence, Monte dei Paschi di Siena. Shortly afterwards, two non-performing Venetian credit unions, the Banca Veneto and the Banca Popolare di Venezia were allowed to be dealt with under Italian law due to their lack of systematic relevance. A further 5.2 billion euros as emergency measures and a further ca. 17 billion in the form of guarantees are straining the Italian budget, whose state debt is the second highest in the Eurozone.

French banks are now demanding an exception from the 0.8 percent legally guaranteed deposits (100,000) not because they are not systematically relevant but because they are too large. In 2012, thanks to pressure from France an exemption under Article 10 (6) of the guidelines on the guaranteed deposit system was created. This meant that countries with a ‘high density’ banking sector are allowed to make a reduced payment of 0.5 percent into the deposit security funds if the EU Commission grants permission. The definition of ‘high density’, as well as its threshold on the banking market remain unclear in the guidelines.

Distorting Competition

France’s five largest banks own cumulatively at least 85 percent of the market and the country’s authorities have already handed in an application to the EU Commission to get rid of the target rate. Signs that this will ultimately be conceded are mounting up: on the one hand the European Banking Authority (EBA) gave France a target rate of 0.5 percent. On the other hand the homepage of the Funds for the Guarantee of deposits and resolution (FGDR) indicates that the target rate accounts for ‘at least 0.5 percent’. In a serious situation it is however doubtful, that a strongly oligopolistic banking sector is less susceptible to crises – it reminds one of a similar market structure from not long ago which was ‘too big to fail’.

As in the case of the Italian bank bails, this may also be about competition-distorting state subsidies. The advantage French banks now have due to the reduced target rate is calculated to be around 3 billion euros. And at around 95 percent, France does not have the most sustainable government debt ratio.

Due to this, all three tiers of the banking union have come under fire. The first, as shown during the stress test, precisely those three banks, amongst others, were stated to have capital shortfall, which are now being saved by the Italian tax payer and therefore the authorities remain powerless. The second is being undermined by current national transactions and the harmonised national deposit funds are losing a lot in terms of functionality as they are undercapitalised.

We would theoretically have the framework to manage banks in such a way that is considerate of national budgets but the test cases showed that the desire to put this into practice is not there. With the threateningly high number of defaulting loans, the current trend towards exceptions does not lead to any form of discipline on the part of other Member States, for whom a functioning banking union is be essential.


Carsten Schneider is deputy chairman of the SPD Parliamentary Fraction, responsible for the budget, finances and the euro.
This article was originally published in German in the Austrian newspaper Der Standard.