Background note on banking union and bank common rules
The last plenary session of this legislature will see votes on three key deals to ensure that banks themselves, and not taxpayers, are first in line to pay the costs of their misfortunes. On Tuesday MEPs will vote to approve two laws dealing with restructuring and winding up troubled banks and an update to the scheme which guarantees deposits under €100,000. This note details these three pieces of legislation, which together move the EU many steps closer to completing banking union.
Yet at the same time, in recent months Parliament has also framed other seminal new rules to prevent bank troubles rather than cure them. Key among these were the capital requirements rules and the establishment of a Single Supervisory Mechanism (SSM) for banks, first pillar of the Banking Union. The capital requirement rules - a background note is available here - will ensure that banks are stronger and act more prudently. The single supervisor, led by the European Central Bank, will ensure that banks’ problems are spotted and corrected earlier. The - the banking crisis showed that national supervisors often struggled to flag up the problems of their country's banking champions early enough and this greatly aggravated repair costs.
Taken together, these preventive and curative mechanisms should ensure that taxpayers shoulder much less bank risk and that banks, like any other business, may make profits but are also first in line to bear their losses and, in the worst case scenario, can be wound up without risking a general financial meltdown.