Better supervision of the banking industry
Moves were made to rescue banks during the 2008 crisis, while Europe is again strengthening the oversight of its banks in reaction to the euro area debt crisis.
Reforms to strengthen the financial system, so as to better support the broader economy, have been enacted both internationally and at EU level. These are aimed in particular at improving the supervision of the banking industry and other financial services.
Towards a banking union
The EU is currently focused on establishing a banking union. It is a key element of a broader plan to strengthen the policy framework underpinning the EU's single currency to address weaknesses that have been exposed by the debt crisis.
The overall plan is to develop a framework for the euro area that is sound, fair and transparent, and that remains open to all EU countries. The aim of the banking union will be to strengthen financial integration and stability whilst restoring confidence in the banking industry.
Common bank supervision
Negotiations on the establishment of a single supervisory mechanism (SSM) under the responsibility of the European Central Bank, initiated in June 2012, are now at an advanced stage.
The SSM is expected to play an important role in breaking the vicious circle between banks and indebted governments, which has been a salient feature of the debt crisis in Europe. In June 2012, euro area leaders decided that once the SSM has been established, the European Stability Mechanism (ESM), the euro area's permanent bailout fund, could, following a regular decision, recapitalise banks directly.
Under the SSM, responsibility for bank supervision in the euro area will be shifted from national authorities to the ECB, with the ECB supervising significant banks directly and national authorities doing the day-to-day supervision of less significant banks. Non-euro area member states that wish to will also be able to participate.
The ECB is expected to assume its supervisory tasks within the single supervisory mechanism in the first half of 2014, subject to operational arrangements.
Capital requirements and other banking measures
The banking union will also feature:
- a single resolution mechanism, to safeguard financial stability if banks fail and to ensure that taxpayers' money need not be used in the event of a bailout;
- a strengthened framework for deposit guarantee schemes that ensure the safekeeping of private savings.
Legislative proposals on bank recovery and resolution and on a strengthened framework for deposit guarantee schemes are currently under consideration. The Commission will soon present a proposal on the single resolution mechanism.
Further to these, negotiations on stricter bank capital requirements are also at an advanced stage. The aim here is to better equip the financial industry for managing risks and absorbing shocks.
The bank capital rules will implement within the EU an international agreement concluded by the Basel Committee on Banking Supervision and endorsed in November 2010 by G‑20 leaders.
Financial supervision: Reforms already enacted
When the financial crisis hit in 2008, it exposed significant weaknesses in the EU's financial sector. Extensive use had to be made of taxpayers' money to rescue banks from collapse and ensure the stability of the financial system.
This action highlighted a complex interdependence in the financial sector. It also revealed the existence of a vicious circle between banks and indebted governments, a potential source of financial contagion.
In order to minimise the risk of a repeat of the 2008 financial crisis, the EU set up new structures for supervision, not only of banking but of the whole financial sector.
Three new EU-level supervisory bodies started work in January 2011: the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority.
At the same time, the European Systemic Risk Board was established in order to provide macroeconomic supervision of the financial system as a whole.