EU banking union

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There have been various talks about making Europe a banking union, with agreements set to be made at the EU summit. The idea behind a banking union is to delegate authority over banks from national capitals and to new EU institutions in Frankfurt and Brussels.

The idea of a banking union arose last year after the financial trouble in Spain caused the country to become a bailout risk.

A mandatory bail-in of 8% of total liabilities is required before resolution funds can be touched. However, countries are given flexibility with regard to protecting certain creditors from losses in defined circumstances.

An additional option giving countries the opportunity to recapitalise banks from resolution funds or state resources is permitted under the banking union agreement. This common ruling is also necessary to give the €500bn Eurozone bailout fund the authority to directly refinance banks.

Talks around the implementation of this banking union have been stalled by each member state wanting rules to accommodate their national banking system. Flexibility over the limitations of the bail-in procedures and national discretion has been contested from either side.

If the banking union goes ahead, the next step is for the European Commission to move for a single resolution system to oversee the Eurozone along with the ECB. This in particular has been strongly opposed by Germany who is against a centralised power with the authority to shut down banks despite existing agreements.

There is some concern that lax bail-in rules under the banking union would cause the smaller less wealthy countries to be forced into imposing losses on creditors – just as with the situation in Cyprus – while the larger and richer EU countries would be able to use public money for bailouts.

However, the common deposit protection, single rulebook and single bank resolution mechanisms could significantly strengthen the Economic and Monetary Union, injecting stability in the whole of the EU.