1. State of Play and Challenges Ahead
Banking Union:
State of Play and Challenges Ahead
Banking Union December 11, 2014 | Brussels Emiliano Tornese Financial Stability | European Commission The views expressed in this document are those of the author and may not in any circumstances be regarded as stating an official position of the European Commission
Philipp Rother
Chief Economic Analyst
18 May 2016

2. Outline Overview SSM – Single Supervisory Mechanism
SRB – Single Resolution Board
EDIS – European Deposit Insureance Scheme
Outlook

3. The Eurozone and the Banking Union
Single Currency
Single Supervisor
November 2014, SSM takes over supervision
Single Resolution Mechanism
January 2015, SRM takes over resolution
Quinn Committee
EDIS / common backstop

4. Key Elements of the Banking Union
Single Supervisory Mechanism
EU19+
Single Resolution Board and SRF
EU19+
European Deposit Insurance Scheme
EU19+
Single Rulebook EU28
CRR/CRD IV BRRD DGSD

5. SSM

6. Single Rulebook ECB Overview of the Single Supervisory Mechanism
Supervisors of non-participating Member States
Coordination by EBA
ECB
Send Preparation and SB Members Execution of Tasks
Supervisors of participating Member States
Single Rulebook

7. Key tasks conferred on the ECB
Significant banks - >30bn assets; >20% national GDP; 3 most important banks, significance of cross-border activites
Licence authorization and withdrawal
Requirements on capital, leverage, liquidity, and governance
Consolidated supervision and supervision of conglomerates
Intervention measures where a bank breaches requirements (coordinating with resolution authorities)
Macroprudential tasks
Structural reforms: Mandate separation of trading activities.
Structural reforms proposal: Article 10(1) states that the competent authorities must require separation if the trading activities of banks (market making, investing in and sponsoring risky securitisation and
trading in certain derivatives) and the related risks are found to exceed certain thresholds and meet certain conditions linked to the metrics. If the bank demonstrates to the satisfaction of
the competent authority that these activities do not endanger the Union financial stability, taking into account the objectives of the proposed Regulation, the competent authority may
decide not to require separation. Article 10(2) states that a competent authority can require separation of a particular trading activity if it considers that the activity in question threatens the financial stability of the bank
or of the Union, taking into account any of the objectives of the proposed Regulation. The competent authority should consult the EBA prior to taking decisions referred to in Article 10 and should notify the EBA of its final decision.
All tasks not explicitly conferred on the ECB are exercised by national supervisors

8. SRM

9. Scope of Single Resolution Mechanism
Mirrors the SSM: all banks established in the Euro Area and other participating Member States
Distribution of tasks between SRB and NRAs:
Board directly responsible for cross-border and significant banks (›30bn; about 200 banks)
NRAs responsible for all other banks (also to adopt resolution decisions if no use of the Fund is required)
SRB ultimately responsible for all banks

10. Single Resolution Fund National Resolution Authorities
manage
ECB
National Supervisors
COM/CON
notify
Single Resolution
Board
bail in
supervise
instruct
contribute
Owners / creditors
National Resolution Authorities
resolve
hold shares/claims
All banks
Failed bank

11. SRB: Triggering resolution in practice
ECB generally determines
bank is failing/likely to fail
Board may also decide if it informed ECB, and ECB has not reacted within 3 days
Board assesses
systemic threat (public interest) and
no alternative private solution
Board adopts
resolution scheme: necessary resolution and funding measures
Resolution scheme is submitted to Commission/Council (24 hours) for endorsement or objection.

12. SRF: Bridge financing Resolution funding
needs to be available immediately,
even as long as SRF is still being filled by banking sector contributions
Each Member State backs the national compartment in the SRF
No mutualisation
Commitment to introduce common backstop by the time the SRF is fully mutualised at the latest (2024)

13. EDIS

14. Key Principles of the Proposal
No claim from EDIS unless DGS ok on DGSD obligations
Switching to EDIS won't imply higher costs for the banking sector overall
All banks in BU covered, but risk-based contributions after Year 3
Risk sharing to go along with risk reduction
Gradual approach: necessary to address legacy issues and avoid moral hazard

15. Gradual approach for EDIS
2024
Phase 1: Re-Insurance
Phase 2: Co - Insurance
Phase 3: Full Insurance

16. Re-Insurance
Risks remain largely national. This reduces moral hazard and addresses legacy.
EDIS would only provide liquidity if the national DGS has exhausted its own resources and complies with DGSD obligations (e.g. capitalisation).
There are other caps and safeguards to protect EDIS.

17. Co-Insurance Co-Insurance is a further development of re-insurance.
Main difference: The national DGS would not have to be exhausted before it can access EDIS.
EDIS will cover some amount from the first euro that the national DGS pays out to its depositors. Risk is therefore partially mutualised.
The degree of available EDIS cover would increase over four years until it is fully mutualised.

18. Development of EDIS and national funds

19. Summary: Risk-reduction in the Banking Union1 2 3 4 5
Implementing Directives
- BRRD
- DGSD
Reducing National Options and Discretions
- Large exposure exemptions
- Stronger role for ECB/SSM in the application of macro-prudential tools
SRB becomes operational
- Preparation of resolution plans
- SRF is established
Deposit Guarantee Schemes
- Harmonized Funding levels,
- Harmonized repayment periods
Targeted prudential measures
- Limit to leverage
- Stable bank funding,
- Comparability of risk weights

20. Outlook Discussions on banking union ongoing in Council and EP
EDIS proposal
SRF backstop
further measures to reduce risk including tackling bank- sovereign link

21. Thank you very much!