1. Banking Union: Does It Work?
Nicolas Véron
Senior Fellow, Bruegel (Brussels)
Visiting Fellow, Peterson Institute for International Economics (Washington DC)
AEA/ASSA Annual Meeting, Chicago
January 6, 2017

2. The Vision Breaking bank-sovereign vicious circle
Creating true single market
All banking policy at European level
Prudential regulation & supervision
Resolution & deposit insurance
LOLR, government guarantees, recapitalization
Bank insolvency, accounting, auditing; taxation
Conduct supervision / customer protection
Macroprudential
Business model determinants: e.g. housing, pensions, corporate & personal insolvency

3. In Practice European Banking Supervision (Nov. 2014)
‘‘Single’’ Resolution Mechanism (Jan. 2016)
‘‘Half Banking Union’’
Monetary Union (MU) + ½ BU = much more resilient than MU alone
Plausible prospects for legislative reform in short/medium term  ‘‘¾ Banking Union’’

4. The Mid-2012 Turning Point
10-year sovereign bond spread over Germany. Source: Bloomberg

5. Banking Union and OMT
‘‘The June 2012 summit was perhaps the most important European Council of my five years in office. (…) I will never forget, a couple of hours later on that Friday, Mario Draghi walking into my office, right before the start of the summit’s last working session. A man under huge pressure, for the first time in the eight months during which I’d seen him at work, he now looked relieved. ‘‘Herman,’’ he said, ‘‘Do you realise what you all did last night? This is the game-changer we need.’’ The commitment of political leaders to European banking supervision created the opening he needed for his own institution to step up its role in the crisis – with words, now famous words, and with action, the OMT, which both came that summer. It was a turning point.’’ Herman Van Rompuy, Speech at the occasion of the Inauguration of the Single Supervisory Mechanism, Frankfurt, 20 November 2014

6. Architecture & Timeline
Eur. Banking Supervision (a.k.a. SSM)
Hosted by European Central Bank (ECB) in Frankfurt
Assumed authority on November 4, 2014
Single Resolution Mechanism (SRM)
New agency: Single Resolution Board (SRB) in Brussels
Started in 2015, fully empowered 01/2016
Single Resolution Fund (SRF): ‘‘national compartments’’ starting 01/2016, gradual mutualization to 2024
European Deposit Insurance Scheme (EDIS)
Legislative proposal 11/2015, under discussion now

7. European Banking Supervision
Excerpt from Schoenmaker & Véron (2016)

8. Euro Area Banks
Source: Schoenmaker & Véron (2016)

9. Supervision: Track Record
Comprehensive Assessment 10/2014
Supervisory Review & Evaluation Process
And 2016 Stress Testing
Decisions on executives, change of control
e.g. Greek banks, Caixa Geral de Depositos
Nudges on governance
e.g. Rabobank, Credit Agricole
Crisis management: e.g. Greece 2015
Addressing systemic fragility
e.g. Portugal, Italy

10. Current Challenges Unfinished business / Significant Institutions
National situations: Cyprus, Italy, Greece, Portugal
Prominent institutions: e.g. Deutsche Bank
Resolution: proof of concept
Less Significant Institutions (<€30bn assets)
Governance & transparency
Single market
Geographical ring-fencing
Cross-border M&A; new entrants
Impact of Brexit

11. Thank You For Your Attention
Nicolas Véron /

12. Additonal Charts

13. Financial System Structures
Percentage of total debt of non-financial companies. Source: Merler & Véron (2015)

14. Non-Performing Loans
% of total loans. Source: Schoenmaker & Véron (2016) based on IMF/FSI database (updated)

15. Bank Governance Models
Source: Schoenmaker & Véron (2016) on 100 euro-area-headquartered Significant Institutions

16. Banks’ Home Countries
Assets of Significant Institutions by home country, €bn. Source: Schoenmaker & Véron (2016, forthcoming at Bruegel)

18. Strengthening Banking Union
Single rulebook
Including supervision + bank insolvency framework
Sovereign exposures
Euro-area-only challenge of home bias
Exposure limits, not risk-weights
Options to stabilize transition
Crisis management instruments / resources
EDIS and backstop(s)
ESM precautionary recapitalization
Consistent approach to ‘‘private-sector bailouts’’ (including, but not limited to, IPSs)

19. Longer-Term Challenges
Missing pieces
Conduct & consumer protection
Accounting & auditing
Making the SRM ‘‘single’’
Banking sector taxation
Institutional complexity
SSM, SRB, ESRB, EBA, DG COMP, DG FISMA, ESM
‘‘ECB demerger’’?
International
Membership streamlining e.g. Basel Committee, FSB
EU compliance