{
  "title": "Banking Union Before Euro Adoption: Flak Jacket or Straitjacket?",
  "publication": "IMF Blog, August 19, 2015",
  "sourceUrl": "https://www.imf.org/en/blogs/articles/2015/08/19/banking-union-before-euro-adoption-flak-jacket-or-straitjacket",
  "canonical": "https://www.imf.org/en/blogs/articles/2015/08/19/banking-union-before-euro-adoption-flak-jacket-or-straitjacket",
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  "summary": "Rationale: The recent crisis led to the realization that a common currency area needed centralized bank supervision and resolution to overcome financial fragmentation and break the link between bank and sovereign stress.",
  "sections": [
    {
      "heading": "Banking Union origins",
      "content": "- Rationale: The recent crisis led to the realization that a common currency area needed centralized bank supervision and resolution to overcome financial fragmentation and break the link between bank and sovereign stress.\n- Elements:\n  - The two main arms of the Banking Union are the Single Supervisory Mechanism and the Single Resolution Mechanism.\n  - The Single Supervisory Mechanism (SSM) aims to raise the credibility and quality of bank supervision by removing the distinction between home and host supervisors.\n  - The Single Resolution Mechanism (SRM) aims to sever the links between bank and sovereign stress by unifying the bank resolution and restructuring frameworks across countries and providing a common, industry-funded backstop.\n  - The other two elements – a common fiscal backstop and common deposit insurance – are also essential to complete the Banking Union.\n- Benefits:\n  - Raise the quality of supervision.\n  - Lower bank compliance costs.\n  - Remove existing barriers to cross-border banking activity.\n  - Lower resolution costs.\n  - Ultimately, lower bank funding costs."
    },
    {
      "heading": "Missing pieces",
      "content": "- With the SSM and SRM now operational, an effective common fiscal backstop is still needed to break the sovereign-bank links.\n- The European Stability Mechanism (ESM) is currently acting as de facto common fiscal backstop for euro area banks, but its powers are limited and the threshold for access is high.\n- The industry-financed Single Resolution Fund (SRF) will be fully funded and mutualized only by 2024.\n- There is still no pan-European deposit guarantee scheme."
    },
    {
      "heading": "Different rules for non-euro area members",
      "content": "- Non-euro area members of the Banking Union would not be treated in the same way as the euro area members.\n  - Non-euro area countries are not members of the European Central Bank’s (ECB) Governing Council, which is charged with adopting decisions drafted by the SSM.\n  - Non-euro area opt-ins will not be eligible for direct bank recapitalization by the ESM.\n  - Non-euro area opt-ins would not have direct access to the ECB liquidity facilities."
    },
    {
      "heading": "Trade-offs when deciding to opt in before euro adoption",
      "content": "- Framework: The decision involves weighing LESS national policy flexibility against COMMON insurance.\n  - LESS national policy flexibility vs. COMMON insurance:\n    - Local supervisors currently have significant flexibility to impose macro- and micro-prudential requirements and use early intervention powers.\n    - Upon joining the Banking Union, some of this flexibility could be lost.\n    - Loss could be mitigated by access to common insurance—fiscal, industry-funded, and deposit insurance backstops—but some of these are not yet in place or not available to non-euro area BU members.\n  - LESS national control over cross-border flows vs. COMMON liquidity backstop:\n    - Membership would limit local authorities’ ability to ring-fence the euro area banks’ subsidiaries.\n    - This is important for the new EU member states, whose banking systems are dominated by the euro-area owned banks which are systemically important in the host countries but account for a small part of the parent bank balance sheets.\n    - Having less control over cross border flows in times of stress could be compensated by access to a common liquidity backstop; however, the latter is not available to the Banking Union opt-ins.\n  - LESS national control over bank resolution vs. COMMON resolution fund:\n    - Upon joining the Banking Union, decisions on whether or not to resolve a bank would be taken at the Banking Union level.\n    - Less control over resolution decisions could be compensated by access to a common backstop; however, until the SRF is fully mutualized, financing of the resolution process will remain largely a responsibility of individual countries."
    },
    {
      "heading": "Decisive factors for individual countries",
      "content": "- The cost-benefit analysis could lead to different conclusions for different countries, depending on their fundamentals.\n- For some countries, an immediate boost to the quality and credibility of bank supervision and eventual access to larger backstops may outweigh other considerations.\n- For others, the attractiveness of early opt-in will likely hinge on:\n  - The Banking Union’s ability to establish a fully equivalent treatment of euro area and non-euro area members.\n  - The Banking Union’s credibility and operational excellence.\n\nJohn Bluedorn, Anna Ilyina, Plamen Iossifov; August 19, 2015.\n\n---\n\n Content in this bundle\n\n- Country Report\n  - Country Report (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Country Report (PDF){rel=\"external\" type=\"application/pdf\"}\n- Country Report\n  - Country Report (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Country Report (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/blogs/articles/2015/08/19/banking-union-before-euro-adoption-flak-jacket-or-straitjacket"
    }
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    "Authors: John Bluedorn, Anna Ilyina, Plamen Iossifov",
    "Published: August 19, 2015",
    "Rationale: The recent crisis led to the realization that a common currency area needed centralized bank supervision and resolution to overcome financial fragmentation and break the link between bank and sovereign stress.",
    "Elements:",
    "Benefits:",
    "With the SSM and SRM now operational, an effective common fiscal backstop is still needed to break the sovereign-bank links.",
    "The European Stability Mechanism (ESM) is currently acting as de facto common fiscal backstop for euro area banks, but its powers are limited and the threshold for access is high.",
    "The industry-financed Single Resolution Fund (SRF) will be fully funded and mutualized only by 2024.",
    "There is still no pan-European deposit guarantee scheme.",
    "Non-euro area members of the Banking Union would not be treated in the same way as the euro area members.",
    "Framework: The decision involves weighing LESS national policy flexibility against COMMON insurance.",
    "The cost-benefit analysis could lead to different conclusions for different countries, depending on their fundamentals.",
    "For some countries, an immediate boost to the quality and credibility of bank supervision and eventual access to larger backstops may outweigh other considerations.",
    "For others, the attractiveness of early opt-in will likely hinge on:",
    "**Country Report**",
    "**Country Report**"
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