The (also known as the Reform Treaty) dictates on

The Economic and
Monetary Union (EMU), as the term union implies, seeks the integration of the economies
of a specified region (Europe in this case) and the establishment of a unified
monetary policy. A unified monetary policy means that countries in the union
should have a single interest rate, joint control of the supply of money, and a
joint control of nominal exchange rates against countries with different


The Treaty of
Lisbon (also known as the Reform Treaty) dictates on Article 3 of the Treaty on
European Union (EU), one of the two treaties that were reformed in 2007, that
‘The Union should establish an economic and monetary union whose currency is
the euro’. This article refers to the requirement that European Union member
states should adopt the euro (except the United Kingdom and Denmark, who are
exempt, under the Maastricht Treaty, of being part of the EMU and have legally
opt-out) 2 3

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There are seven
main institutions that are responsible of the EMU. The most relevant are the
European Commission, which is in charge of monitoring that Member States comply
with the EMU, the Council of the EU in Economic and Financial configuration,
which coordinates the policy-making with the European Parliament (EP) and
determines if a country meets the criteria to join the euro (convergence
criteria regulated under Article 140(1) of the TFEU), and the most relevant of
all institutions, the European Central Bank (ECB), is responsible of setting
monetary policy and is the main supervisor of the Eurozone financial

The ECB had to
be set as a fully independent institution due to its position as central bank
of 19 states, all with different political objectives. This is really important
as its mission, together with the national central banks, is to maintain price
stability in the Eurozone as a whole (there is only one inflation target for
all members).5 This objective is reached, mainly, by the use of
interest rates as the main monetary policy instrument. As well, it is important
to note that the treaties only give European institutions, the ECB in this
case, the role of controlling monetary policy, but it does not give it control
of implementing fiscal policies. However, there is an exception to this when
member states request a bail-out (even though article 105 of the TFEU specifies
that EU Member States should not be liable for the debts of other members, this
is called the no bail-out clause).


The global
financial crisis that started with the U.S. subprime defaults in 2007 and then
spread around Europe in the 2009, exposed how interdependent the European
Economies are. It was of relative importance how Eurozone banks were exposed to
this interdependence.

This situation
let to policymakers in Brussels to start working towards preventing similar
crisis’s in the future. In 2012 the European Commission made a communication to
both ‘legislative’ bodies of the EU, the European Parliament and the Council of
the European Union. The communication, titled ‘a roadmap towards a Banking
Union’, calls for ‘shifting the supervision of banks to the European level’.6


Now, the
completion of the banking union seems closer than ever. Recently, the President
of the European Council, Donald Tusk, has repeatedly declare that its
completion is “possible and necessary” and he added that this would also be the
“first reality check” to prove if the Eurozone can be ‘further transformed’.7



History of the problem and past EU action


By now, you
should be able to understand what the banking union is and under what grounds
it was created. The role of this section is, in a way, to enumerate key events
that led to the banking union that we have now.


The first step
towards the banking union was taken in June 2009 when the European Council
accepted the recommendation that was included in the publication of the Larosière
report. This report, published in February 2009, received its name from the
chair of the High-Level Group on Financial Supervision in the EU. Recommendation
10 of said report states:

“Member States and the European Parliament should avoid in the future
legislation that permits inconsistent transposition and application;


the Commission and the level 3 Committees should identify those national
exceptions, the removal of which would improve the functioning of the single
financial market; reduce distortions of competition and regulatory arbitrage;
or improve the efficiency of cross-border financial activity in the EU.
Notwithstanding, a Member State should be able to adopt more stringent national
regulatory measures considered to be domestically appropriate for safeguarding
financial stability as long as the principles of the internal market and agreed
minimum core standards are respected.”


The Single
Rulebook, which applies to all (not only euro area) Member States, had the aim
of establishing a common regulatory framework for the financial sector.8
The end aim was to complete the single market in this particular field by, mainly,
requiring capital requirements for all banks in the EMU, protecting deposits,
and preventing the failure of banks.9

The first action
after the Council’s recommendations came from both legislative bodies of the EU
(the European Parliament and the Council of the EU). EU regulation 1092/2010
established the European Systemic Risk Board (ESRB) on the 24th of
November 2010 10.


The ESRB is an
independent EU body under the European Central Bank which task is to, as it
name implies, prevent systemic risk (defined by Tomuleasa as the phenomenon
that is related to systemic shocks that affect many institutions, markets and
systems simultaneously11) that may cause instability in the
financial system, and to conduct the appropriate macro-prudential policies
(this is the set of policies used to reduce the systemic risk of the entire
financial system).12


On the same day
that the ESRB was established, EU regulation 1093/2010 from both legislative bodies
of the EU created the European Banking Authority (EBA). This is one of the three
European Supervisory Authorities (ESAs) that the European Council recommended in
March 2009. The other two being the European Insurance and Occupational
Pensions Authority (EIOPA), and the European Securities and Markets Authority
(ESMA).13 This three ESAs conduct the micro-prudential (supervision
of individual institutions) supervision of the EU financial system and are
responsible to enforce the single rulebook.12


The EBA replaced
the Committee of European Banking Supervisors (CEBS) and its role is to
regulate and create rules for financial institutions that operate in the EU.
However, the supervision of this rules and regulations in under the competence
of the ECB.14 This EU institution is based in London but will soon
be moved to Paris as a consequence of the Brexit vote.15


The previous
four institutions (EBA, EIOPA, ESMA and ESRB) are all part of the European
System of Financial Supervision which is the framework for financial
supervision in the EU.12


The fact that
those institutions are not able to conduct ‘day-to-day’ supervision in EU countries
led Eurozone countries to go even further. In 2012 they started developing a banking
union with a single supervisory mechanism (SSM) and a single resolution
mechanism (SRM). It is important to understand that even if the previous four
institutions and the Single Rulebook are applicable to all EU Member States, these
two mechanisms are only for Eurozone countries and any EU Member State that may
wish to participate in a ‘close cooperation agreement’.16 However, full
membership is not possible without joining the euro since the ECB only has
binding powers on Eurozone countries.17


The Single
Supervisory Mechanism (SSM) is the only, common, system of banking supervision
in Europe and its form by the ECB and national authorities.18 One of
the main roles that this mechanism covers, that flaw that the ESAs and the ESRB
had, is day-to-day supervision which make it responsible of supervising about
4,700 institutions among all participating Member States.18 However,
not all institutions are supervised by the ECB. Indeed, the ECB only supervises
those credit institutions consider as ‘significant’ and national competence
authorities (NCAs) supervises those are ‘less significant’ under the watch of
the ECB.19 (refer to the Guide to banking supervision, November 2014
box 1 for more information regarding the criteria that qualifies an institution
as ‘significant’)


The Single Resolution
Mechanism (SRM) is the system that ensures the correct resolution of EU credit
institutions with the main objective of protecting taxpayers from paying the
costs of the failure through the prevention of bank runs, contagion, the strengthen
of confidence in the financial sector, among other objectives.20


The SRM consists
of the Single Resolution Board (SRB) and a Single Resolution Fund (SRF). The
SRB (or the Board) is the main decision-making organ of the SRM. The Board
decides about how resolutions take place when banks are failing (or determines
if a bank is likely to fail) and is the ultimate responsible organ for banks in
the banking union. At the same time, the FUR (or the Fund) is an established
supranational fund that is used as an instrument of last-resource for failing
banks. This fund is funded by the financial sector at it should consist of at
least a 1% of the total amount of deposits in the credit institutions that are
members of the banking union. 21

The SRM works in
the following steps:

1.     The
ECB, which is the supervising institution under the SSM, notifies the SRB that ‘a
bank is failing or likely to fail’;

2.     At
an executive meeting it is decided whether a private solution is possible;

3.     ‘If
the conditions for a resolution are not met the bank is liquidated according to
national laws’;

4.     If
the conditions are met a resolution process is adopted.21


The SRM was not
fully in force until the 1st of January 2016. Since then, it has
only be used once