Understanding the banking union and ESFS
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What is the banking union?
The banking union is an institutional framework. Its aim is to ensure Europe’s banks operate under a single set of rules. The banking union consists of the Single Supervisory Mechanism, the Single Resolution Mechanism and a system of harmonised national deposit guarantee schemes.
Why do we need the banking union?
The 2008 financial crisis and subsequent sovereign debt crisis exposed weaknesses in the European banking sector. As a result, the banking union was created. It is a crucial step towards a stronger, more unified and transparent banking system – and thereby towards genuine Economic and Monetary Union.
How can we have a more integrated banking sector?
- Establish the European deposit insurance scheme. This would provide stronger and more uniform insurance for depositors across the euro area. And it would also help to foster more cross-border demand.
- Encourage cross-border consolidation. This allows banks to be more cost-effective and spread their exposure to risks. If a bank in one of the countries participating in the banking union wants to acquire a large stake in another bank or perform a merger, the ECB, as the European banking supervisor, has to approve this. We call this large stake a qualifying holding.
What is the European System of Financial Supervision?
The European System of Financial Supervision (ESFS) is a network designed to ensure consistent and appropriate financial supervision across Europe. It’s centred around the European Supervisory Authorities (ESAs), the European Systemic Risk Board (ESRB) and the national supervisory authorities.
There are three ESAs:
- the European Banking Authority (EBA)
- the European Insurance and Occupational Pensions Authority (EIOPA) and
- the European Securities and Markets Authority (ESMA)
The ECB is the European banking supervisor. It works closely with all three ESAs, especially the EBA.
What does the European System of Financial Supervision do?
The ESFS covers both macroprudential and microprudential supervision .
| Macroprudential supervision | Microprudential supervision | |
|---|---|---|
| What is it? | Overseeing the financial system as a whole to prevent or mitigate risks to the financial system. | The supervision of individual financial institutions, such as banks, insurance companies or pension funds. |
| Who's responsible? | The European Systemic Risk Board (ESRB), which is based at the ECB’s offices in Frankfurt am Main, Germany. | The European Supervisory Authorities (ESAs). These include the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority. |
| How is it done? | The ESRB identifies systemic risks. It also issues warnings and makes recommendations on how to address them. The ESRB does this in coordination with the ESAs and international organisations. | The ESAs work to harmonise financial supervision in the EU. They do this by maintaining the single rulebook – a set of prudential standards for financial institutions. The ESAs ensure these rules are consistently applied to create a level playing field. |