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Citation suggestion: Damir Odak, DO (2023). The banking union — a potential catalyst of the future of the European Union. Future Europe, 3(1), 37–45.


The banking union is a globally unique endeavour to integrate the banking systems of various countries with independent fiscal policies and diverse legal systems. It lacks completion, because it has been initially designed by EU member states (MSs) who were unable to reach a consensus on the deposit insurance scheme. 

The banking union was an answer to the fiscal crisis in 2012. Its major declared objective is the elimination of the fragmentation of the EU banking market as well as the separation of the sovereign–bank nexus at the national level. However, achieving these objectives will not prevent a crisis similar to the one that occurred in 2012. 

Thus far, the level of confidence vested by investors in banks in the Eurozone is significantly lower than those in non-EU and US banks. To date, published data do not explain why this is the case. The created framework failed to motivate cross-country mergers of EU banks and the creation of a homogenous Eurozone banking market. As such, the completion of the banking union could significantly improve this situation, and its success is crucial for the future of the EU integration. Only the creation of a true sovereign–bank nexus at the EU level would enable full banking integration in the EU. 


The banking union is more unique than the majority of other EU structures. The existing regulatory structure is not a consequence of a deliberate political decision. Instead, it was created as a by-product of pragmatic solutions applied when MSs failed to reach a consensus on the intended solution. Such a status has severe consequences, as presented in this paper. Nevertheless, the consequences could be much more serious and far-reaching if significant adverse developments affect the banking sector in the EU. 

The fundamental logic of banking regulation and supervision is simple: the state guarantees the deposits of banks1; therefore, it holds the evident authority to supervise all entities that require such guarantees. Moreover, the business of banking, especially its associated problems, can exert significant economic and, therefore, political impacts. To mitigate such risks, the state (i.e. the Parliament) appoints the agency or agencies responsible for supervision and regulation, which are, in turn, accountable to the Parliament for their results.2 

This system was also intended for the EU. However, although the legislative process initially went well, as demonstrated by the completion of two out of the three intended pillars,3 the MSs failed to agree on the third pillar or the so-called European Deposit Insurance Scheme (EDIS). 4 This situation created inconsistency in the system.  A single supervisory mechanism (SSM) supervises, while the national government potentially pays the price if a bank goes bankrupt. To further complicate this structure, the national government does not pay if the failed bank is resolved in any other way. The resolution is then paid by the creditors of the banks and funds available to the single resolution mechanism (SRM). 

Such a peculiar arrangement opens numerous questions and dilemmas. The most important one is the fact that the SSM was supposed to be single. However, omitting the guarantor or the MS from the process was impossible. This solution would be very questionable because the one who is supposed to bear the consequences must have a very loud say. This requires an arrangement of shared responsibility between national and EU institutions in the supervisory process. Although such arrangements are designed to operate smoothly,5 their performance under stress is yet to be evaluated. 

Another important consequence involves the resolution function. After the implementation of the SRM, the resolution strategy decides who pays the costs and who is responsible for the implementation of the resolution. Such a decision can lead to significant economic and financial consequences for MSs. 

A consistent system, which potentially emerges from the finalisation of the banking union, would require decision-making and cost internalisation at the level of EU institutions. In this case, EU institutions would be solely responsible for ensuring the smooth and reliable operation of the Eurozone banking sector. 

Sovereign–bank nexus and financial market fragmentation 

The decision to push forward with the banking union was made in 2013 as a consequence of the crisis in 2012, the year when the EU underwent its biggest financial turmoil. It was hit by the consequences of the Greek de facto default on public debt, while several other countries were running the gauntlet of barely sustainable public debt. In this situation, Mario Draghi turned the table with his famous speech ‘whatever it takes’ on 26 July 2012. 

His statement required resolute regulatory changes to prevent the repetition of the circumstances of 2012. As EU problems emerged primarily from the fiscal area, fiscal policy was a logical area for regulatory intervention.6 However, fiscal independence was a very politically untouchable issue, such that EU politics did not even seriously endeavour to discuss fiscal integration. Instead, a decision was made to initiate radical changes in the financial sector. Through the establishment of the innovative concept of a banking union, such changes were intended to preclude fiscal problems by breaking the ‘fragmentation of the EU financial sector’ and the ‘sovereign–bank nexus’. Therefore, instead of doing what was deemed impossible, EU politics decided on an action that could be agreed upon by MSs and pretended that this initiative was the solution. This approach is a reminder of a joke about a man looking for a lost key under the streetlight, although he lost it on the other side of the street, which was dark. 

Fragmentation is a term given to the differences among national banking systems in the EU, while the nexus represents the case of a strong coordination between the governments and banks of MSs. They are described as items 2 and 6 in the introduction of the SSM Regulation.7 

Therefore, the sovereign–bank nexus was blamed for fragmentation and development in 2012. It needed to be omitted with the introduction of the banking union. The nexus consists of the following processes:8 

  • The accumulation of the government debt of MSs from banks operating in a particular MS; 
  • Sovereign guarantee for the banks; and 
  • The influence of economic activities of a particular MS on the health of banks and governments. 

The influence of the centralisation of supervision in the SSM on any of these processes and the prevention of the repetition of a crisis similar to that in 2012 through centralised supervision were and remained unclear. 

Banks will continue to hold sovereign debt, because it is defined as a zero-risk weight item in the Basel accord,9 the sovereign guarantee of deposits remains and the health of banks and governments would always influence and be influenced by economic activity in the MS. For these issues, the method of banking supervision is irrelevant. 

Although supervision is seemingly an appropriate tool for addressing fragmentation, it is also a bold assumption. Fragmentation is the consequence of objective forces. With exposure to the national economy and fiscal policy, national banks dance to the domestic tune of the economy. 

The developments in 2012 were a consequence of irresponsible fiscal policy, faulty disclosure of government debt and, in one case (Ireland), government guarantee for banks.10 As such, no connection existed between banking supervision, the establishment of responsible fiscal policy and appropriate reporting on public debt. Although supervision in certain MSs was weak, the establishment of a unique, partially centralised system opened significant uncertainties simply due to its uniqueness. 

Furthermore, the sovereign–bank nexus is a concept that banks strive for since their earliest beginning, and banking functions the best when it is firm and reliable, providing banking with a backstop from political authorities. 

An effective policy against fragmentation is integration. If integrated EU banks were to operate in an integrated EU economic/fiscal area, then fragmentation would disappear. However, following the crisis, the sovereign–bank nexus at the MS level was seemingly strengthened instead of diminished. To overcome fragmentation, this nexus should be encouraged instead of suppressed but at a new level, that is at the EU level. 

Measuring the success of the Banking Union 

Measuring the success of banking regulation and supervision remains an elusive task. Alternatively, it is a relatively elusive task during normal times. During a crisis, the measure becomes self-evident. 

Fortunately, at the moment, the evaluation of EU supervision is an elusive task. Despite the relatively high pressure coming from several directions, the banking system is not in a crisis. Optimists would state that the scenario renders the measure of success self-evident, whereas pessimists may add only one word at the end of the sentence: ‘yet!’. 

This study applies several measures to determine the level of performance of the banking union. The first one would be a methodology published under an ambitious title: Banking Union’s accountability system in practice: A health check-up to Europe’s financial heart. 11   

The authors conclude that ‘”You can’t see the forest for the trees” so the saying goes. Yet, when it comes to Banking Union accountability, a closer look to the details of every tree is needed to see the forest with a fresh pair of eyes.’. In other words, the proposed method for health check is very detailed and systematic. It is frequently based on measuring the quantity of communication between the European Parliament, the European Banking Authority (EBA), and the Single Supervisory mechanism (SSM) operations of the European Central Bank (ECB). It also intends to determine the quality of this communication. The findings are mixed at best, as the conclusion identifies weak accountability. 

Although the abovementioned approach is relevant for assessing the quality of regulatory communication and for determining how well the SSM explains its actions to the Parliament, it is barely useful for assessing the quality of supervisory actions. The reason is simple: members of the European Parliament are seldom experts on banking supervision. This fact also explains the lack of focus on communication, which was frequently observed by the authors. 

Such a measure could be usable in good times. On a rainy day, the only thing of importance is the resilience of the system and banks under shock. The aforementioned form of health check is not aimed to indicate the resilience under shock. 

Information about resilience requires answers to different questions. The first one is a judgement on the health of the banking system from the perspective of those most interested in it, that is, the shareholders of banks. Their valuation of banks’ stock is a simple and robust measure of shareholders’ confidence in the reported figures. 

Under normal circumstances, the average bank share is always valued above its book value. The invested money managed by professionals and the stable cash flow generated from mainly captive businesses should always be more valuable than cash of the same face value. The balance sheet of a bank is only a pile of cash or cashable assets; however, if shareholders believe that it is appropriately evaluated, then they would pay it above book value. Historically, proving this case is easy. For example, the average valuation of US banks is always higher than their book value, except during extreme shocks and stagflation periods. 

Examining data from the ECB,12 the P/B13 of Eurozone banks decreased to less than one in 2009 and remained at this level with a few oscillations until 2022. The same ratio reported by US banks never went significantly below one within the observed period. Other sources presented similar results.14 Evidently, at the beginning of 2021, the unweighted average P/B of all banks (EU banks excluded from the calculation) and of US banks was well above the book value amongst the 100 biggest global banks. Different from US banks, the listed EU banks were traded well below their book value for an extended period.15 In June 2022, according to Bloomberg, the eight biggest publicly traded banks based in the Eurozone were traded on average (unweighted) at 46% of their book value, while none of them displayed P/B higher than one. The eight biggest publicly traded banks in the United States are traded at an (unweighted) average of 112% of their book value, while five of them exhibited P/B ratios higher than one.16 

Notably, the price of the stocks of Eurozone banks recovered close to an average P/B ratio of one with the introduction of the SSM in 2014. However, something decreased the enthusiasm of investors, such that the ratio decreased again to 0.6 in 2015. 

On the basis of these data, shareholders and prospective investors seemingly do not believe in the book value of EU banks. Another more concerning aspect is that other bank managers do not believe in the reports of their colleagues. Otherwise, a major bank with a P/B ratio of 0.25 and a P/E of 3.5 would be an irresistible target for acquisition with potential suitors queuing in front of its door. In other words, buying it would be more profitable than smuggling blood diamonds. 

If one assumes that shareholders properly value the capital of their banks, that would significantly decrease the value of equity of EU banks. The total leverage ratio based on market capitalisation would halve, compared with one based on the declared capital of the Eurozone banks. The overall leverage ratio based on the market capitalisation in June 2022 would get near 3.3%,  only a notch over the Basel III accord minimum. Such an approach would leave a few very significant banks underwater.17 

Should auditors and supervisors perceive market sentiment as a signal to treat the banks’ books with bigger caution? No formal requirements are in place to do so. Although it should not be dismissed as irrelevant, a market valuation cannot be taken as completely reliable. Market perception could be distorted and stay so for a significant period of time.18 Therefore, additional and easily quantifiable objective measures are also required. An example is the leverage ratio. The ECB published a fully loaded leverage ratio in Q4 of 2021 that amounted to 5.86%.19  

If the leverage is calculated simply by dividing capital by total assets, then the ratio is 6.8%. This measure will be used for a consistent comparison. 

If the same calculation is conducted for US banks,20 then their respective ratio is 9.7% or 43% more equity per unit of assets. The difference of 43% in the reported equity per unit of assets does not mean proportionally more resilience. The United States banks obtained a 6.7 percentage point (ppt) capital to total assets ratio higher than the Basel minimum required leverage,21 while the ratio of the EU is at the same time 3.8 ppt above this level22. Thus, an average US bank enjoys 84% more buffer over the Basel minimum. Furthermore, as market events are approximately normally distributed, such a difference in buffer size could indicate that the banking system of the United States has ten 10 or more times less likelihood of a widespread banking crisis (dependent on the assumed relative position of respective national banking in the distribution of future adverse events). 

Based on all the abovementioned measures, significant space exists for the SSM to improve the resilience of the banking system of the Eurozone and, even more, the confidence of investors in it. 

What causes the lack of confidence? A number of analysts claim that the present bank stock pricing of the Eurozone assumes extremely adverse tail events.23 Nonetheless, prices remain down as of mid-2022 despite improvements in major indicators. Such a situation has currently lasted for 14 years. 

Initially, the reasons that underlie the process were transparent and understandable. Stock prices reacted to losses in 2008. Worries about forbearance, high non-performing loans (NPLs) and low profitability then depressed banks’ stock prices them. However, supervisors addressed all of these problems, made them transparent to investors while bankers reported them as resolved. By the end of 2021, a reported average return on equity of EU banks was stable in the range of 7%,24 while the average return on investment was double this figure. NPLs are low,25 and the Texas ratio26 was low across the board. 27 These figures should have made shareholders confident and happy. 

Nonetheless, the STOXX600 banking index, which fell from more than 530 to less than 130 index points in 2009 with certain oscillations in the meantime was still at 125 in June 2022. None of the performance indicators of major EU banks could explain the reason. 

Without an extensive opinion poll conducted among investors and potential investors in bank stock, providing evidence-based responses about the underlying cause is impossible. However, this project is beyond the scope of this paper; thus, it offers no definite answer. 

Notably, the increased confidence of investors occurred simultaneously with the introduction of the SSM. The entire process of the introduction of the SSM appeared relatively convincing to investors, and the average P/B was gradually increasing to 0.9, while the best-performing banks reached more than one. This indicates that investors welcomed the SSM at the time of its introduction. Therefore, the confidence deficit appeared after the introduction of the SSM. 

The enthusiasm of investors was short-lived, and the STOXX600 banks were back at 130 index points and a P/B ratio of 0.6 in 2016. The market has maintained these figures untill mid 2022. 

Nonetheless, claiming that the confidence deficit is a consequence of the lack of activity on behalf of supervision would be certainly erroneous. Indeed, supervision invested a huge effort, but the effects of such efforts were limited by several unusual obstacles placed in front of supervisors. 

The first peculiarity is that the SSM is not allowed to order an accounting adjustment unless it exercises it through the powers entrusted to it by the national supervisors of the SSM country, 28 which are based on the local legal framework. Such an approach is not a consequence of the law but of a too restrictive reading of it. Supervision is allowed to do only what is explicitly mentioned in the regulation. Other supervisors possess this authority. Without accounting adjustments, establishing a case of non-compliance or the failure of banks is impossible.29 

This type of constraint motivated supervisors to create several imaginative and bold regulations that bypass this limitation. Although these efforts partially resolved the problem, they created other unintended consequences.30 

In addition, the SSM is a supervisor but not a regulator of the banking market. Such a position severely limits the ability of the SSM to influence banking regulation, especially in the complex EU political environment, which renders the regulatory development much slower and politically demanding. 

The specificity of the SSM is also an complicated situation concerning the procedures of the lender of the last resort. All other supervisors cooperate with only one such lender, while the SSM has 19 of lenders of last resort,31 that is, national central banks. However, as members of the currency union, they are exposed to serious limitations that may not always enable them to follow the Bagehot dictum.32 

Another peculiarity of the EU regulatory environment is the frequent querulant attitude of banks towards the supervisor. Tens of active court cases are initiated by banks against supervisory measures. A huge majority of these cases were initiated as soon as banks met the legal preconditions to initiate litigation without even attempting to use all available resources to reach an agreement with supervisors. 

The motivation for such an approach may be present if banks are convinced that the supervisor is so constrained, such that additional legal pressure and the generated legal risks would constrain it even further. However, rational shareholders would always pay more for the shares of a bank that is supervised by a strong and proactive supervisor. It provides an additional level of vigilance, which protects the interests of shareholders. Conversely, bank management prefers to face weak supervision.  

Numerous litigations indicate that banking regulation opened sufficiently murky areas, because a very unlikely scenario is that SSMs or bank lawyers are reckless and pursue pointless cases. Therefore, lawmakers and regulators likely contributed to the situation in a significant manner. 

The discrepancy between the reported and market values of banks firmly confirms the confidence gap. It could be irrational or caused by a form of PTSD among investors,33 or it could be the consequence of the rational perception of certain important facts not presented in reports. Whatever the ultimate cause is, the situation requires the focus of the EU regulatory and supervisory community. A bank with a P/B of 0.25 cannot raise new capital if needed. 

Cross-border integration of EU banks 

Any bank management faces the strategic choice between integrated corporate governance and holding structure. Integrated governance means organising a single bank that is operating in several countries through local branches but maintaining a single governance structure with one management operating all branches and reporting one balance sheet and profit-and-loss statement (P&L). In contrast, a holding structure means that a banking group consists of a number of subsidiaries organised around a holding company. The holding strategically steers the subsidiaries, but each of them has a separate management, balance sheet and P&L. The integrated model is more suitable for the single market, while the holding model is an ideal form of organisation that covers multiple markets. 

Despite the establishment of a banking union, banking in the Eurozone has remained national. Only one example of cross-border integration is notable—Nordea,34 the bank that integrated its subsidiaries across Scandinavia into a single bank. 

Other banks are cautious despite the encouragement they receive from the SSM.35 This cautiousness is reasonable and emerges from two sources. The first is the interest of banks, and the second is the interest of governments. 

The policy of banks is driven by uncertainty about the future dynamics of EU integration and its potential impact on specific markets. By retaining a holding structure, they possess the flexibility not only to adapt business policy to national circumstances but also to dispose of certain businesses if they need extra capital or feel uncomfortable with local legal or business developments. In this sense, cross-border integration would render such flexibility much more difficult. 

The interest of governments emerges from securing fiscal income. If a bank is integrated, then it reports its profit and pays taxes in the country of its domicile. In addition, an independent bank employs more people than would the branches of an integrated bank. Furthermore, a national bank would be much more involved in the domestic sovereign–bank nexus than would an integrated bank. Therefore, the governments of host countries are motivated to retain banks incorporated in their jurisdiction. 

Another issue is the uncompleted EDIS. As the government of a domicile country guarantees all deposits of a local bank, cross-border integration could significantly increase potential liabilities, which creates a potentially unbearable fiscal burden and a shock to the national financial system. Nonetheless, in the present architecture, a counter-argument may exist. Cross-border integrated banks tend to be larger and more complex; therefore, the possibility that the selected resolution strategy would be bankruptcy is less likely. If the resolution strategy would prevent bankruptcy, then the guarantee of the government would not be realised. Nonetheless, its very existence could force the government to participate in bail-out with all adverse fiscal and political consequences. The SRM is aware of the cost of the local deposit guarantee scheme in the case of bankruptcy; thus, the participation of the government could become an important negotiating point during the preparation of the resolution. 

Therefore, the interests of banks and governments are slowing down the integration process for the time being. The process of cross-border integration would be very helpful in overcoming fragmentation; however, it remains on hold as banks are waiting for the unfolding of the developments in the EU political arena. If the fiscal and legal policies of EU members remain fully independent, then the holding structure could be a better fit. The absence of EDIS and the unresolved issue of taxation of bank branches emphasise such a conclusion. 

Completing the Banking Union 

The fact that EU politics did not complete all the three announced pillars of the banking union certainly has consequences. It is not possible to firmly claim a connection between the earlier described situation in the capital market and the fact that seven years of work on it the EDIS still did not produce a final roadmap. Nevertheless, this fact is a signal to participants in capital markets, definitely not an encouraging one. Completing the banking union as it was initially announced would certainly be a step in the right direction. Forecasting the extent to which completing the union would turn around market perception is difficult, but the completion of the banking union certainly would not worsen the perception. 

The introduction of EDIS as a convincing and reliable tool would create an opportunity for revisiting and streamlining supervisory procedures without the burden of shared responsibility. Afterwards, all responsibility would be at the EU level, such that all decision-making could be conducted at the EU level as well.36 This notion does not indicate that the present distributed supervisory architecture should be firmly centralised. Nevertheless, the centralisation of decision-making during crises could render it more efficient and, therefore, more convincing. 

Is the finalisation of EDIS feasible today in the current political environment, which is characterised by multiple crises? EU politics successfully averted a long list of more demanding challenges, and the completion of EDIS is certainly within its reach. A possibility exists that it was only put aside for the time being, because it required substantial work and negotiation, and it did not seem critical. The SSM worked apparently well without it, such that it could wait. This perception could prove to be too relaxed, as the banking union will need all three legs to stand firm if things get rough. 

Why is the success of the Banking Union crucial for the future of the EU? 

The fact that the banking union is not the best tool for addressing the matters that it was supposed to address does not mean that the SSM is a wrong idea. It only means that it was designed for pragmatic reasons and marketed as a solution for the wrong problem. In particular, it was implemented in a piecemeal fashion, that is, it was a part of the solution needed to appropriately address the problem instead of being the entire solution. 

The proper objective for the banking union is described under item 5 in the introduction to the SSM regulation, which discusses the standardisation of banking supervision at the EU level. As part of the overall EU integration process, such standardisation is a key precondition for the previously mentioned establishment of the new EU-wide sovereign–bank nexus. Indeed, the SSM is the best possible tool to achieve it. Without the SSM, such a nexus is hardly tenable, because inconsistent regulatory and supervisory approaches would permanently fragment the market. 

The banking union, which is an important part of the overall integration architecture of the EU, becomes the cornerstone of this architecture. Furthermore, the structure was left uncompleted, that is, without its third pillar. Although the missing pillar could be nearly neglected as long as no major problems surfaced in the banking sector, the lack of it could lead to far-reaching consequences in the crisis. Intuitively, we know that a chair on two pillars would not endure any shake-up, while the one with three legs is the most difficult to overturn. 

As a consequence of its prominent position, the banking union became more than a major part of the EU integration process. It became the benchmark of its success. Consequently, EU banking became the most federalised area of EU regulation. As such, it also became the laboratory for testing integrationist policies. The success of the banking union could significantly influence the approach towards further EU integration. 

Future risks 

The future facing EU banking is beset with risks. Having a relatively thin capital buffer over the Basel minimum is not a sign of excessive robustness. The attitude of shareholders conveys a worrying message. Therefore, the road ahead does not appear smooth and safe. 

The meaning of ahead for the EU banking sector is also questionable. For example, the consequences of the 2008–2009 shock were recognised and mainly resolved between 2012 and 2015. If such is the rhythm, then the consequences of the COVID-19 pandemic are still ahead

Moreover, the banking system currently faces increased inflation and pending interest rate hikes. It is reliant on a heavy mortgage portfolio that is plagued by two risks, namely, fixed rates and housing prices. Weak demographics and increasing interest rates hold the potential to significantly influence the currently soaring housing prices. 

EU politics is seemingly convinced that a combination of slow-motion problem recognition and smart intervention on the part of supervision would be sufficient for preventing any politically sensitive development in EU banking. However, the behaviour of investors indicates that the market has a few doubts about the reliability of the mechanism. Furthermore, banks frequently disrespect and legally attack supervisors. This scenario could be an indication that the time is right for EU institutions and MSs to rethink their attitude towards banking regulation. 

Open questions for the future 

The banking union, as a step following monetary integration in the EU, was a strange choice. Logically, the major point of integration would be fiscal. Historically, only one case of integration of banking supervision preceding fiscal integration is recorded: the EU banking union. 

Although it is a strange beginning, it is not the wrong one. The banking union could be successful given that it is complete, while permanently standing as a point of integration in an otherwise decentralised EU. 

However, in such an environment, the SSM should find a means for accommodating permanent fragmentation, because the sovereign–bank nexus would remain at the national level. This notion could denote less cross-border integration and the predominant retention of holding instead of the integrated management structures of banks. The endeavour to equally address banks that are objectively unequal because they operate in different markets may be possible; however, designing the tools needed to achieve it would be a daunting challenge for the SSM.37 

The war in Ukraine can be an important catalyst. It does not only create several uncertainties but also indicates that the Great Moderation period is behind us economically and politically. The world is back in its normal state in which the power of arms decides geopolitics. In her recent speech, Isabel Schnabel called this new reality ‘a great volatility’. Although it is a return to historically normal circumstances, we are fortunately still not accustomed to it. As the union created around the Great Moderation, the EU needs time and effort to adjust to this new reality. The adjustment could require the promotion of further integration. 

Once the three-pillar banking union is completed, the way forward for the banking union is dependent on the appetite of MSs for further integration. If the EU integration continues to gain momentum, it would trigger an even further integration of EU banking through the gradual establishment of the EU-wide sovereign–bank nexus. Without further integration, the SSM should adjust to fragmentation and its singleness will be under permanent pressure, because the same approach to banks in different environments would not always be optimal. Despite all prospective difficulties, retaining integrated banking supervision is a crucial point. The European banking market is already too integrated and interdependent for independent national supervisors. EU-wide financial stability, the integration of financial markets and independent national supervision/regulation of banking form the impossible trinity, which can be resolved only if one of the objectives is abandoned. 

Despite the possible answer to the big question of EU integration, the interests of shareholders and overall financial stability could be improved if EU lawmakers were to contemplate why banks are querulant and uncooperative with supervisors. After all, lawmakers established the SSM to protect the interests of the EU and its MSs instead of as a playground for bank lawyers. 

The regulatory environment surrounding EU banking is imperfect and incomplete. Its further development requires considerable thinking and decision-making, which may extend beyond the completion of the proposed architecture of the banking union. Based on its present position, no reasonable alternative exists to the SSM. 

If the EU level sovereign–bank nexus is the desired outcome, then even the completed banking union, which is composed of three pillars, would remain short of the objective. Achieving this requires the success of wider integration agenda. If such a nexus is not the objective, then the banking union could prove to be an excessive step and, thus, become a framework that is permanently deprived of institutional preconditions required for achieving optimal results. 

While steering the future of its banking regulation, EU institutions and its MSs should consider that banking holds the power to inadvertently decide the future of the EU. 


  1. It is important to keep in mind that in the EU a state guarantee is on the other hand supported by legal obligation of all banks to redeem costs incurred to the government by failing banks through their participation in the DGS scheme. The supervision is needed to ensure that the shock, if occurs, is bearable for the financial system, and that individual banks can sustain sudden losses incurred by it. Otherwise, the shock could create a domino effect, forcing the government to commit irredeemable funds.
  2. In the case of the legal environment in the EU, in which banks are the final obligors for all such costs, the agency can also be liable to the banks if costs occur in the case of its omission and, thus, return the cost burden to the government budget.
  3. Single supervisory mechanism (SSM) and single resolution mechanism (SRM)
  4. For detailed rationales and interests that underlie the reluctance of implementing EDIS, the reader is encouraged to see TÜMMLER, M. (2022). Completing Banking Union? The Role of National Deposit Guarantee Schemes in Shifting Member States’ Preferences on the European Deposit Insurance Scheme.
  5. Although not always with optimal results, as will be discussed in Chapter 3.
  6. Among the hardest hit economies were two that experienced widespread banking crisis, namely, Ireland and Spain, which were generated by economic shocks in the construction sector and losses in the US market, respectively. Banking supervision was unable to make a significant difference in these areas.
  7. Council regulation (EU) No 1024/2013
  8. Gi-Dell’Ariccia, C. Ferreira, N Jenkinson, L Laeven, A Martin, C Minoiu, A Popov (2018): ‘Managinga sovereign-banking nexus’; www.ecb.europa. eu.
  9. Basel Committee on Banking Supervision, (2010 rev 2011). The supervisor cannot limit a bank’s exposure toward sovereign debt denominated in domestic currency, based on credit risk.
  10. Those events were also strongly influenced by events in global financial markets in 2008–2009. Though the weakness of some member states’ credibility would most likely occur independently, absent global financial shock the situation would most likely have been much easier to resolve.
  11. Marco Lamandin and David Ramos Muñozunder; European Law Journal (2022), p. 1–31
  12. Financial stability review, ECB, May 2019, Box 5, p 66–69
  13. Price/book ratio – the ratio between market price and book value of a stock
  14. For example: Dr D. Holländer, (27. August 2021); What drives banks’ price-to-book (P/B) ratios? The balance sheet – what else!: https://www. bankinghub.eu/banking/research-markets/price-to-book-ratios
  15. It is unclear whether those are Eurozone, EU or overall European banks. However, the conclusion would be similar in both cases.
  16. That can also be explained by the difference in the profitability. Though unweighted average P/E is about 8,5 in both groups, Eurozone banks’ average P/E is distorted by an outlier traded on high P/E due to low profitability. Removing it from the sample, European P/E becomes significantly lower than the US (6,7:8,4).
  17. That is only a speculation, as none of the supervisory standards allows such an approach. Besides, as it is visible from the next chapter, the pricing issue at the moment lacks any ‘substantial’ reason potentially requiring accounting adjustment.
  18. J. M. Keynes once said: ‘Markets can remain irrational longer than you can remain solvent!’
  19. https://www.bankingsupervision.europa.eu/banking/statistics/html/index.en.html
  20. https://www.federalreserve.gov/releases/h8/current/default.htm
  21. As US legal requirement is higher than the Basel requirement and applicable buffer is much lower. However, bank getting marginally below legal requirement would be, though incompliant, much healthier than the EU’s marginally compliant bank, giving regulators much more space for manoeuvre.
  22. Providing that ratio between approximated and fully loaded leverage is the same in US and Eurozone.
  23. For example, MAN institute. (September 2018). European Banks – A Closer Look at an Unloved Sector.; https://www.man.com/maninstitute/european-banks-closer-look-at-an-unloved-sector Quote: ‘We believe for the best-run banks in Europe, you’d need some fairly apocalyptic tail events to justify current pricing’.
  24. https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.supervisorybankingstatistics_first_quarter_2022_202207~7df1e28443.en.pdf?160f4850deffd9818a3b419175a7e925
  25. Ibid, table T4.03.2, p. 74.
  26. The ratio between equity of the bank and net value of non-performing loans (NPL). The higher the ratio is, the more capital is invested in NPL, and bank solvency is therefore more dependent on the value of NPLs.
  27. Ibid, table T4.03.2, p. 74 gives overall SSM NPL of 423 bn EUR with coverage of 43%. Net value of NPLs is 237 bn EUR. T00.01 p2 gives equity of 112 largest SSM banks of 1.600 bn EUR. Average texas ratio was below 15%.
  28. Most of the supervisory authorities, when they judge that the bank overvalued its assets have the authority to order the decrease in accounting value to a more realistic one. SSM should achieve this objective by using indirect tools, requiring more work and opening administrative and legal risks.
  29. Such a reading of the law is akin to the pilot who suffocated during check-list execution, as ‘breath in–breath out’ instruction was not written in the list.
  30. Odak D., (2020), A political economy of banking supervision, p. 105–114.
  31. On January 1st 2023 Croatia joins the Eurozone. However, as there is no significant institution on the consolidated level in Croatia, it will remain 19.
  32. Central banks should lend early and without limit, to solvent firms, against good collateral, and at high rates.
  33. Post-traumatic stress disorder – distorted perception of reality and behavioural distortion appearing as a consequence of excessive stress.
  34. Maybe it is worth noticing that Nordea was the only significant Eurozone bank on 23 June 2022, with P/B over 1.
  35. Enria, A. (2021) How can we make the most of an incomplete banking union? https://www.bankingsupervision.europa.eu/press/speeches/date/2021/html/ssm.sp210909~18c3f8d609.en.html
  36. Today the working compromise is that non-strategic entities whose assumed resolution strategy is bankruptcy (and therefore could trigger insurance pay-out) are supervised by a domestic supervisor, while strategically important entities having different resolution strategies are supervised by the SSM. It remains to be seen if the final ‘three pillars’ system would follow a similar dividing line as it could represent a serious obstacle to the implementation of EDIS.
  37. The fact that SSM is not a regulator of EU banking market would also influence its ability to achieve it.


​​Basel Committee for Banking Supervision (2010, rev. 2011), A global regulatory framework for more resilient banks and banking systems. Bank for International Setlement. 

​Dirk Holländer, D.E. (2021). Banking Hub by Zeb. Retrieved from what drives banks’ price-to-book (P/B) ratios? The balance sheet–what else!, August 27, https://www.bankinghub.eu/banking/research-markets/price-to-book-ratios 

​ECB Banking supervision (2022), Supervisory Banking Statistics, May,  www.bankingsupervision.europa.eu: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.supervisorybankingstatistics_first_quarter_2022_202207~7df1e28443.en.pdf?160f4850deffd9818a3b419175a7e925 

​Grodzicki, M., d’Acri, C. R. and Vioto, D. (2019). ‘Recent developments in banks’ price-to-book ratios and their determinants’. Financial Stability Review, May, Box 5, 66-69. 

​Enria, A. (2021). How can we make the most of an incomplete banking union?. September 9, www.bankingsupervision.europa.eu: https://www.bankingsupervision.europa.eu/press/speeches/date/2021/html/ssm.sp210909~18c3f8d609.en.html 

​Giovanni Dell’Ariccia, C. F. (n.d.). Managing the sovereign-bank nexus, www.ecb.europa.eu: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2177.en.pdf 

​M, L., & D., R. M. (2022). ‘Banking Union’s accountability system in practice: A health check-up to Europe’s financial heart’. European Law Journal, 1-31. 

​MAN institute (2018, September). European Banks–A Closer Look at an Unloved Sector, https://www.man.com/maninstitute/european-banks-closer-look-at-an-unloved-sector 

​Odak, D. (2020). A Political Economy of Banking Supervision (Springer).  

​The Council of the European Union (n.d.), Regulation (EU) No 1024/2013, eur-lex.europa.eu: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32013R1024.  

​Tümmler, M. (2022). ‘Completing Banking Union? The Role of National Deposit Guarantee Schemes in Shifting Member States’ Preferences onthe European Deposit Insurance Scheme’. Journal of Common Market Studies, 1-17. 


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