Expert advice and political choice in constructing European banking union

Abstract

International actors promoted the transfer of regulatory authority and financial resources from national governments to the European Union in the context of establishing the prerequisites for financial stability in Europe through banking union. It was supplied, however, by a political process that kept significant resources in resolution and deposit insurance largely in national hands. This paper examines the politics behind those decisions, and how the hybrid of European and national competences affects bank regulation and financial stability in the EU. It concludes that the tension between strong EU supervisory powers and weak capacity to deal with insolvent institutions will persist.

From governance to government: Banking union, capital markets union and the new EU

“…However, the most difficult reform for governments to swallow was the proposal for a pan-European and mutualized deposit insurance scheme (EDIS) without which, it is widely agreed, the Eurozone lives with a major vulnerability (Donnelly, 2016; Schoenmaker and Gros, 2012; Véron, 2015). EDIS would require the centralization of formerly national sovereign powers and the creation of pan-European fiscal obligations.…”

“…Highlighting the perils of collectivizing risk through a common currency without also mutualizing responsibility, variegated deposit insurance schemes in the Eurozone crisis encouraged bank runs and crisis-compounding capital movements. Examples included Ireland’s emergency commitment to provide unlimited insurance in 2008 (Donnelly, 2016: 12), which put banks in other Eurozone countries at risk of depositor flight, and the problem of depositor flight from Greek banks.…”

“…But regardless of expert advice from the IMF, the European systemic risk board (ESRB) and the ECB, the European Commission relented in the face of member state reluctance to accept mutualization (Donnelly, 2016). Instead of EDIS, in April 2014, the Commission and EP adopted the Directive on Deposit Guarantee Schemes (DGSDs) in the EU.…”

The role of the EU institutions in establishing the banking union. Collaborative leadership in the EMU reform process

“…Hennessy, on the other hand, maintains that the EU institutions acted mostly as 'facilitators' and that member states determined the design of financial supervision (Hennessy [2014]: 154-155). Donnelly (2014Donnelly ( , 2016 even draws a link between the EU's prevailing intergovernmentalism and the generally disappointing results in terms of providing financial stability.…”

The European Banking Union as a contributing factor to financial stability

“…In this context, the public interest in ensuring the EU's financial stability against systemic risk prevails over the protection of relevant private interests (Chiti et al 2019, p. 127). Donnelly (2016) adds that "financial stability refers to the capacity of banks and other financial institutions to meet the demand of their creditors and depositors on a daily basis". 40 Article 127(5) TFEU stipulates that "The European System of Central Banks (hereinafter ESCB) shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system".…”