In November 2014, the banking union became a reality when the European Central Bank, ECB, took over responsibility for supervision of the largest euro area banks. The 19 euro area member states are automatically members of the banking union, while the remaining EU member states can opt in.
Danish participation in the banking union is yet to be decided. In March 2015 a report to the former government concluded that altogether much speaks in favour of Danish participation. At the same time, additional clarification in some areas would be desirable. In July 2017 the government decided to launch a review which should pave the way for a decision on Denmark's participation in the banking union in the autumn 2019 at the latest.
The banking union consists of two elements. One is a strong and single supervision of all large European banks. The other is a uniform and consistent practice for crisis management in relation to large European banks i.e. also banks with European cross-border activities. Thus, the banking union includes preventive measures as well as actual handling of distressed banks – which must not involve the use of taxpayers' money.
The purpose of establishing the European Single Supervisory Mechanism for banks is to ensure that the rules – and their interpretation – are the same in all participating member states. This means, for example, that valuation of a banking transaction is performed in the same way irrespective of whether the bank is domiciled in Germany, Spain or Finland. This will help to ensure that no-one leaves out or conceals large losses which could ultimately lead to a new financial crisis. A single supervisory mechanism also provides a better basis for comparison. In this way, it is possible to track trends across many large credit institutions. This makes it easier for the supervisors to react early. At the same time, it implies increased and external supervision of the financial sector in every single country.
The ECB directly supervises the 125 largest European banks and issues guidelines and rules for the supervision – also the supervision of smaller banks, which will still be performed by the national supervisory authorities.
Since 2016, responsibility for crisis management in relation to large banks in the banking union has been joined in a single European authority, the Single Resolution Board, SRB. For each bank, the SRB will prepare a credible action plan to have in hand in the event that the bank experiences serious problems. In addition, the SRB is to handle the actual resolution of distressed banks.
The term "resolution" may need further explanation. It is not about closing the bank. It is about "tidying up" the bank to ensure that its most important functions – for its customers and for the financial system – can be continued. This will be achieved without the use of taxpayers' money. Those who have invested in the bank, i.e. owners and investors, will bear the losses. This principle is known as "bail-in", and Denmark was among the first countries to introduce it.
The EU framework on bail-in also comprises a requirement for the institutions to have sufficient liabilities that are eligible for absorbing losses in a resolution situation. This is necessary for the authorities in the given situation to be able to handle a resolution that ensures the financial stability.
Basically, the crisis management in the banking union is based on three principles:
Firstly, a single authority ensures that the rules are the same for large and cross-border banks. The SRB establishes uniform and consistent practices for management of distressed banks, and ensures the continuation of the functions that are crucial to the costumers and the financial system.
Secondly, the owners and investors will bear the losses of a distressed bank ("bail-in").
Thirdly, in extreme cases, after the owners and investors have borne their losses, it will be possible to draw on a Single Resolution Fund in connection with the resolution of a distressed bank. No taxpayers' money will be involved as the Fund will be made up of contributions from banks in the participating member states.
The three principles were put into practice when the Spanish bank, Banco Popular was resolved by the SRB in June 2017.
Why banking union?
The financial crisis and the subsequent European sovereign debt crisis revealed a clear need for tighter rules for banks and the authorities to have a more uniform practise across the EU. Much of this regulation has already been implemented at the EU level. Many of the new rules have been transposed into national legislation by the individual member states. However, this legislation leaves fairly wide scope for action and interpretation. As a result, practice varies across member states – which gives rise to uncertainty and increase the risk of creating an unlevel playing field.
With a single supervisory authority and a single crisis management authority within the banking union, a great deal of this uncertainty can been addressed and it can provide a basis for enhanced competition across borders.
Danmarks Nationalbank's views on Danish participation
Danmarks Nationalbank believes that Denmark should join the banking union. In short, it is Danmarks Nationalbank's assessment that participation will benefit Danish households and firms.
Generally speaking, the banking union will make a positive contribution to financial stability. This is relevant to all of us. As we saw after 2008, a financial crisis can have a severe impact on the economic infrastructure most of us rely on: investments, mortgage loans, business growth opportunities, employment, and government revenue and expenditure. The banking union can be seen as a bulwark against future financial crises. It will also ensure that the impact is less severe if banks do, nevertheless, become distressed.
In addition, there are a number of special factors that make it particularly interesting for Denmark to participate in the banking union.
Some Danish banks and mortgage banks are very large relative to the size of the economy. In Danmarks Nationalbank's assessment, supervision of the largest Danish banks and mortgage banks would be strengthened in the banking union. Danmarks Nationalbank also finds that participation in the banking union would be an advantage if a large Danish bank or mortgage bank ever became distressed. A single, powerful resolution authority would then be better equipped to minimise the adverse effects on the economy and the financial system without the use of public funds.
A level playing field across borders would also enhance competition in the Danish banking market, which would only be to the benefit of Danish households and firms.
Furthermore, as a member of the banking union, Denmark would have a say when European rules, standards and practices are being established. Inter alia, this means that the mortgage credit model would be more strongly positioned inside than outside the banking union.