The European Banking Union: integrating supervisory approaches

European integration is a long and yet uncompleted trip. The first event in which European politicians formally discussed the idea of integrating European countries was the Hague Congress on May 7–11, 1948, in which delegates from some 20 European countries proposed a “European assembly”. Later on, Belgium, France, Germany (Federal Republic), Italy, Luxembourg, and the Netherlands signed in the Paris Treaty establishing the European Coal and Steel Community on April 18, 1951. A few years later, the same six countries signed the treaties establishing the European Economic Community and the European Atomic Energy Community on March 25, 1957. During the following decades, the European Economic Community was extended to almost all Western European Countries. On June 19, 1990, the Schengen Agreement was signed to abolish border controls among Member States of the European Communities. In 1992, the Treaty on European Union was signed in Maastricht by members of the European Economic Community: this lays the basis for a common foreign and security policy, closer coopera- tion on justice and home affairs, and the creation of an economic and monetary union, including a single currency. The European Economic Community was replaced by the European Union (EU), and the single European Market was created on January 1, 1993. A very (probably the most) important event in European integration is the creation of a single currency (labeled the Euro) that replaced national currencies: in May 1998, 11 EU Member States (Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain) formalized the decision to move to a single cur- rency. Then, on January 1, 1999, the Euro was launched and the European Central Bank (ECB) took responsibility for the EU’s monetary policy. In the following years, various other countries joined the Euro and, currently, the Euro area includes 19 countries (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovenia, Slovakia, and Spain). The global financial crisis (GFC) stimulated EU countries to integrate their regulatory and supervisory frameworks further. Specifically, the GFC of 2007–2009 and the follow- ing sovereign debt crises (when investors started to differentiate among the credit risk of different European countries, spurred by the very high level of sovereign debt in some countries) forced EU governments to approve a massive amount of state aid (€1.49 trillion in capitalization and asset relief programs; €4.3 trillion in guarantees and liquidity meas- ures) towards the banking systems between the beginning of 2008 and October 2014. These crises showed the weakness of the European regulatory and supervisory frame- work. Thus, European institutions started a long reform process labeled the European Banking Union (EBU). The EBU is structured in two1 pillars to foster orderly banking crisis management. The EBU’s first pillar focuses on harmonizing banking supervision. Specifically, EU countries moved from a decentralized system (based on the home-country control) to a centralized system labeled Single Supervisory Mechanism (SSM). The second pillar aims to establish a common European regulatory framework to manage bank crisis events orderly: this is labeled as Single Resolution Mechanism (SRM). The operationalization of the EBU has taken some time to complete (Figure 22.1) due to the radical changes it requires. Nevertheless, the EBU led European banks to have a unified regulatory framework for supervision (Single Supervisory Mechanism – SSM) from November 4, 2014, and resolution (SRM) from August 19, 2014. The remainder of the chapter summarizes the current features of SSM (Section 2) and SRM (Section 3). Finally, Section 4 concludes the chapter.