New CEPR Policy Insight - Two proposals to resurrect the Banking Union: the Safe Portfolio Approach and Single Resolution Board

Wednesday, November 25, 2020

A new CEPR Policy Insight proposes two solutions to provide a politically and economically viable path to revive the Banking Union. First, by creating a model ‘Safe Portfolio’ and incentivising banks to move toward it. Second, empowering the Single Resolution Board (SRB) by reforming the resolution framework and setting up a European deposit insurance.

The European Banking Union remains incomplete and fragmented. Years after its conception its two stated objectives – breaking future contagion between banks and sovereigns, and creating a true single market for banks – have not been achieved.  A few years of economic growth have additionally lulled European policymakers into a false sense of security, yet the risk of a return of the diabolic loop is alive and well. The economic fallout from the Covid-19 pandemic has made the dangers of an incomplete Banking Union even more evident.


Luis Garicano, Member of the European Parliament and Vice-President of Renew Europe

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A new CEPR Policy Insight by Luis Garicano, Member of the European Parliament and Vice-President of Renew Europe, suggests two proposals to push forward and complete the Banking Union.  

  1. First, is the proposal to introduce sovereign concentration charges that promote the establishment of a European ‘Safe Portfolio’ (as also proposed by German Finance Minister Olaf Scholz), moving European banks away from large exposures to their own sovereign while preserving Member States’ access to finance and facilitating the path towards a European Safe Asset without joint liability. 
  2. Second, the Banking Union must profoundly reform and properly fund the Single Resolution Board (SRB) to break the link between bank failures and state intervention. This will empower the SRB by reforming the resolution framework and setting up a European deposit insurance.

"The banking market is more fragmented now than it was at the inception of the Banking Union”

Of the planned three pillar structure of the Banking Union, only its first pillar (the Single Supervisory Mechanism), is working smoothly. The second pillar, the Single Resolution Mechanism, is being circumvented, along with the bank resolution framework, while Member States continue to spend taxpayer money to prevent investors from incurring losses. The third pillar, a European deposit insurance, has been paralysed for five years.

“The economic fallout from the Covid-19 pandemic has additionally made the dangers of an incomplete Banking Union evident, but it has also proven its worth, as the common supervisor, the only fully functioning pillar, took decisive action early in the crisis to provide capital and regulatory relief to banks

In 2013, the European Council stated it was imperative to break the vicious circle between banks and sovereigns and to respect the integrity of the Single Market by creating a Banking Union. The factors causing contagion from banks to sovereigns have not been eliminated (thanks to a broken resolution framework and an inexistent common deposit insurance) and the factors causing contagion from sovereigns to banks also remain. This diabolic feedback loop between a Member State and its own financial system put the Union’s common currency at risk and, with it, the future of the European project.

This policy insight presents a viable way forward for reform of the Banking Union; an attainable proposal to cut the link from sovereigns to banks, facilitating the market development of a system-wide asset to be followed by a truly safe asset without implicit or explicit cross-country guarantees, and to cut the link from banks to sovereigns by creating a reinforced European resolution authority, the SRB.

  • Politically, the proposal is feasible in a short-term capacity (as opposed, for example, to proposals to harmonise liquidation in all Member States, which would take decades): there are no permanent transfers between countries, and the proposal aims to eliminate the risks of moral hazard that worry some stakeholders. 
  • Economically, the proposal cuts both sources of contagion in the diabolic loop: the fact that banks have a diversified portfolio eliminates the link from sovereigns to banks, while the fact that Europe will have a true resolution system that covers all banks and includes deposit insurance eliminates the link from banks to sovereigns. 

NoteLuis Garicano is a Member of the European Parliament and Vice-president of Renew Europe. This paper is written in a personal capacity, and not in the name of Renew Europe.

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