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Banking Union Explained

The Commission tabled this month proposals for a common bank supervision in Europe, a first step towards a banking union, an idea Parliament has advocated since 2010. MEPs are determined to tackle the issue quickly as it is seen as an essential anti-crisis measure and insist that the future EU supervisory system should be transparent and under democratic control. On 26 September the EP's economic committee will scrutinise the plans. Here is an introduction to what the banking union is all about.

What are the main elements of a banking union?

A banking union would be primarily made up of three major components: a single bank supervisor; a common bank crisis management and resolution system; and a uniform system for protecting depositors' savings. These may be complemented by changes in the rules on how banks operate.

The banking union aims to cut the link between banks and national budgets. If banks are put under common supervision and funds are earmarked at the EU level in support of troubled banks, this should relieve some of the market pressure on member states and help them get lower borrowing costs, thereby further easing debt levels. Confidence should also improve with the knowledge that all banks in the economic area play by the same rules.

A snapshot of banking supervision

The Commission's proposal places all euro zone banks under the supervision of the European Central Bank (ECB). The ECB will be responsible for licensing credit institutions, ensuring compliance with key banking requirements and having the power to close down banks if necessary. Another proposal deals with the future relations between the ECB and the European Banking Authority.

The Commission proposals envisage that the first phase of this supervision will be up and running on 1 January 2013.

Initial MEPs' reactions to the Commission proposals

Parliament has started to scrutinise the two proposals. EP president Martin Schulz told the German press this week that he expects a wide majority in Parliament in favour of legislation that is differentiated and country-specific.

MEPs gave their first official reaction to the proposals just one day after their presentation through a resolution adopted during the last plenary session. The resolution stresses the need to enhance the democratic accountability of the banking supervisor and emphasises that this major change in supervision should be accompanied by an equivalent increase in transparency and accountability of the ECB's supervisory functions.  

"The Parliament must be fully involved in both pieces of legislation. At a time when the ECB has become centre stage in both economic and political events ... it is all the more important that the voice of the directly elected house must be seen to play a strong role beyond that of merely giving an opinion," said British Liberal-Democrat Sharon Bowles, the chair of the Parliament's economics committee, during the plenary debate.

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