Banking Union

The Banking Union increases stability –
but risk reduction must be done
before adding new elements

The European Banking Union consists of the Single Supervisory Mechanism, the Single Resolution Mechanism, and the harmonisation of national deposit guarantee schemes.

The purpose of the Banking Union is to support the stability of financial markets, to weaken the link between banks and sovereigns, and to promote a level playing field.

The implementation of “bail-in” ‒ shareholder and creditor responsibility ‒ is of key significance. The costs of banking crises will be primarily paid by banks’ owners and creditors. Secondarily they will be funded through banks’ joint liability using the Single Resolution Fund.

The Finnish financial sector supports the Banking Union. We believe it will increase the stability of the euro area financial market, and that single supervision and a single rulebook will promote fair competition.

Risk reduction is necessary before the completion of the Banking Union

The Commission made a legislative proposal for a European Deposit Insurance Scheme (EDIS) in November 2015. FFI has been critical of the proposal and has instead supported the harmonisation of national deposit guarantee schemes in EU countries. The introduction of an EDIS is possible only only after sufficient risk reduction measures have been taken and the existing legacy problems have been thoroughly dealt with. It must be designed as a liquidity support system where possible losses are borne nationally.

In FFI’s opinion, it is important to minimise the use of joint liabilities in the Single Resolution Mechanism. Crisis resolution measures should be primarily financed through investor bail-in. The threshold for the use of the Single Resolution Fund should be as high as possible.

The non-performing loans and other legacy assets that strain some countries’ banking sectors have to be solved in accordance with the EU Bank Recovery and Resolution Directive (BRRD) and State aid rules. If asset management companies (“bad banks”) are used as a solution, they must be national instead of bloc-wide, and all possible losses must be also covered nationally, not jointly within the Union. If need be, the EU can set up a harmonised framework that is nationally applied by Member States.

The operations of asset management companies must be as market-based as possible, and they must not distort the competition. If State aid is used, it must be done in accordance with the rules that primarily require the partial implementation of investor bail-in.


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Financial and Prudential Regulation

Veli-Matti Mattila

Director, Chief Economist

Financial and Prudential Regulation

Olli Salmi

Head of Banking Regulation