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Understanding the banking union and ESFS

Banking union

The banking union is an important step towards a genuine Economic and Monetary Union. It allows for the consistent application of EU banking rules in the participating countries. The new decision-making procedures and tools help to create a more transparent, unified and safer market for banks.

Why the banking union?

The need for a banking union emerged from the financial crisis of 2008 and the subsequent sovereign debt crisis. It became clear that, especially in a monetary union such as the euro area, problems caused by close links between public sector finances and the banking sector can easily spill over national borders and cause financial distress in other EU countries.

The purpose of the banking union is to make european banking:
more transparent by consistently applying common rules and administrative standards for supervision, recovery and resolution of banks
unified by treating national and cross-border banking activities equally and by delinking the financial health of banks from the countries in which they are located
safer by intervening early if banks face problems in order to help prevent them from failing, and – if necessary – by resolving banks efficiently
Commission communication: A roadmap towards a banking union

The elements of the banking union

The banking union has two pillars:

  • Single Supervisory Mechanism (SSM)
  • Single Resolution Mechanism (SRM)

The two pillars rest on the foundation of the single rulebook, which applies to all EU countries.

Single Supervisory Mechanism

The Single Supervisory Mechanism is a new system of banking supervision for Europe. It comprises the ECB and the national supervisory authorities of the participating countries.

Single Supervisory Mechanism

Single Resolution Mechanism

The main purpose of the Single Resolution Mechanism is to ensure the efficient resolution of failing banks with minimal costs for taxpayers and to the real economy. A Single Resolution Board will ensure swift decision-making procedures, allowing a bank to be resolved over a weekend. As a supervisor, the ECB will have an important role in deciding whether a bank is failing or likely to fail.

A Single Resolution Fund, financed by contributions from banks, will be available to pay for resolution measures.

Single Resolution Mechanism

Single rulebook

This set of rules provides legal and administrative standards to regulate, supervise and govern the financial sector in all EU countries more efficiently. It includes rules on capital requirements, recovery and resolution processes and a system of harmonised national Deposit Guarantee Schemes.

The package of EU laws under the single rulebook applies to all EU countries. The banking union ensures that these rules are implemented consistently across the euro area and in other participating countries.

European System of Financial Supervision

The European System of Financial Supervision (ESFS) is a network centered around three European Supervisory Authorities (ESAs), the European Systemic Risk Board and national supervisors. Its main task is to ensure consistent and appropriate financial supervision throughout the EU.

As the European banking supervisor, the ECB closely cooperates with the ESAs, especially the European Banking Authority (EBA).

The ESFS covers both macro-prudential and micro-prudential supervision.

Macro-prudential supervision

Macro-prudential supervision involves oversight of the financial system as a whole. Its main aim is to prevent or mitigate risks to the financial system.

European Systemic Risk Board

The European Systemic Risk Board (ESRB) is responsible for macro-prudential supervision of the financial system in the EU.

Although not part of the ECB, the ESRB is based at the ECB’s offices in Frankfurt am Main, Germany, and the ECB ensures its Secretariat.

Tasks

The main tasks of the ESRB are:

  • collecting and analysing relevant information to identify systemic risks
  • issuing warnings where systemic risks are deemed to be significant
  • issuing recommendations for action in response to the risks identified
  • monitoring the follow-up of warnings and recommendations
  • cooperating and coordinating with ESAs and international fora
Composition

The President of the ECB is also the Chair of the ESRB.

The ESRB brings together representatives of the national central banks of EU countries and the Chairs of the three European Supervisory Authorities.

European Systemic Risk Board

Micro-prudential supervision

Micro-prudential supervision refers to the supervision of individual institutions, such as banks, insurance companies or pension funds.

European Supervisory Authorities

The ESAs are the:

  • European Banking Authority (EBA)
  • European Insurance and Occupational Pensions Authority (EIOPA)
  • European Securities and Markets Authority (ESMA)
Tasks

The ESAs work primarily on harmonising financial supervision in the EU by developing the single rulebook, a set of prudential standards for individual financial institutions. The ESAs help to ensure the consistent application of the rulebook to create a level playing field. They are also mandated to assess risks and vulnerabilities in the financial sector.

Composition

Each authority has a Chair who represents the organisation. However, operational decisions are taken by their respective Board of Supervisors, which are composed of representatives of the national supervisors of each country.

Joint bodies

Board of Appeal

The Board of Appeal is an independent body responsible for appeals by those affected by decisions of the three ESAs.

It is composed of six members and six alternates, appointed by the ESAs.

Joint Committee

The Joint Committee of the ESAs ensures cross-sectoral consistency in the development and application of the single rulebook.

Representatives of each of the three ESAs participate in meetings of the Joint Committee, thereby ensuring cooperation and a regular exchange of information.

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Whistleblowing