Crucial steps taken in the creation of a Banking Union
A banking union is being set up by the EU to help keep Europe's financial system stable and prevent another crisis from taking place. It requires finding a fast and efficient way to deal with failing banks while ensuring that taxpayers are spared from paying for bankers' mistakes.
On 15 April, the European Parliament has adopted 3 key legislative initiatives: Deposit Guarantee Scheme Directive, Bank Recovery and Resolution Directive and Single Resolution Mechanism.
The key ingredients for a banking union
An efficient banking union requires legislation on how to deal with failing banks, protect small depositors and better supervise banks.
Why states keep bailing out failing banks...
Because banks are at the heart of the economy, drawing in deposits, savings and financing investments, their health is of paramount importance. If they get into serious trouble, governments usually opt to bail them out with taxpayers’ money, even if that means a sharp increase in public debt, rather than risk economic meltdown in the wake of bank failures.
...And how to prevent this from happening again
Banking legislation is being reformed in order to prevent countries from using taxpayers' money to shore up failing banks. On 15 April MEPs voted on a deal that would enable authorities to quickly deal with failing banks. For this they would be able to rely on a €55 billion bank-financed fund rather than resorting to taxpayers' money. Most importantly, bank losses will have to be borne mostly by shareholders and bondholders, giving them more incentive to protect taxpayers and control bankers' risk taking..
Protecting people's savings
In order to safeguard people’s savings, MEPs have also voted on an update of the deposit guarantee scheme directive, which introduces national bank-financed guarantees for savings up to €100,000.
Better supervision of banks
The Parliament already supported the establishment of a single supervisory mechanism back in September 2013. This gives the European central bank (ECB) the responsibility to supervise the euro zone’s biggest banks. This will help to identify problems sooner and take care of them efficiently.
The EU also adopted legislation to limit banker bonuses in order to discourage them from taking excessive risks that could take down a bank.
Banks are now also required to hold sufficient capital in order to weather financial difficulties.