Written by Andrej Stuchlik,

One of the few positive outcomes of the worldwide financial crisis that began in 2007 was renewed vigour in EU banking regulation. New capital requirements laws now strengthen the resilience of European banks and protect everyone’s savings from future financial shocks.

Better banking regulation

Reforming the structure of the EU banking sector
© Vladislav Kochelaevs / Fotolia

Since the financial crisis, the EU has adopted more than 40 legislative and non-legislative measures to comply with new rules for international finance and to make the EU’s financial sector safer and more responsible. It has also set up a banking union to bolster the euro area. The aim is to internalise the social costs of bank failure through capital-adequacy requirements, while not inadvertently discouraging banking activity, and to mitigate potential negative impacts on the financial stability of countries and regions.

Crisis prevention – prudential requirements

Capital and liquidity requirement provisions aim to make banking activities safer by ensuring that firms can cover their unexpected losses and fund their ongoing activities. The supervision of financial institutions is benchmarked against international standards, set by the Basel Committee on Banking Supervision (BCBS) and/or the Financial Stability Board (FSB). These non-binding standards are transposed into EU norms through the Capital Requirements Directive (CRD-IV) and Regulation (CRR), which have been continuously revised and modified since 2006. The latest revision began in November 2016. With the BRRD and DGSD (see below), it forms the Single Rulebook, applying to all EU members.

Crisis management – bank recovery and resolution provisions

The Bank Recovery and Resolution Directive (BRRD), in force since July 2014, governs how to assess the resolvability and resolution plans of EU banks and reinforces the taxpayer protection through a bail-in mechanism. Since 1 January 2016, this allows for reducing the value of debts owed by a bank to creditors or for their conversion into equity, in order to limit state aid for ailing banks. The BRRD specifies which kind of capital and liabilities are considered ‘bail-in-able’ instruments in a dedicated capital requirement.

Consumer protection – deposit guarantee schemes

The Deposit Guarantee Schemes Directive (DGSD) of 16 April 2014 amends previous legislation of 1994 and harmonises the rules governing deposit guarantee schemes in all EU Member States: it ensures that deposits continue to be guaranteed for up to €100 000 per depositor and bank, and shortens pay-out procedures from 20 to 7 days (as of 2023).

Further integration for the euro area – banking union

Under a system in force since November 2014, banks operating in the euro area are now part of the banking union. Thus far, it has two pillars, a single supervisory mechanism (SSM) and single resolution mechanism (SRM). The ECB assumed supervisory tasks under the SSM, to directly oversee all ‘significant’ euro-area banks (in cooperation with Member States). The SRM unifies resolution for banks under its remit and creates a central resolution authority, the Single Resolution Board (SRB), and a Single Resolution Fund (SRF).

Challenges – EDIS, too-big-to fail and Brexit

In late 2015, the European Commission proposed a third pillar for the banking union, a European Deposit Insurance Scheme (EDIS), to distribute the risk associated with protecting depositors from local bank failures to the banking union as a whole, and to disentangle the link between banks and states. The file is still in negotiation along with the Commission proposal, similar to US legislation after the crisis, to split large banks – if necessary – to reduce their systemic risk. Finally, Brexit and upcoming ‘equivalence decisions’ will have a substantial impact on financial services in the EU (the UK’s market share in the EU is approximately 24 %).

This note has been prepared by EPRS for the European Parliament’s Open Days in May 2017.