Solutions on the Operation of the European Banking in the Community Area

By Negurita, Octav | Economics, Management and Financial Markets, March 2014 | Go to article overview

Solutions on the Operation of the European Banking in the Community Area


Negurita, Octav, Economics, Management and Financial Markets


ABSTRACT. The banking union represents a long term project that affects both the euro area countries and those outside the monetary union, involving the transfer of competences towards the supranational authority, pooling resources and creating new institutions. Since the emergence of the euro, the European banking sector has developed, and the banks have expanded across borders. In this way, the coordination of the national surveillance at bank level is no longer sufficient, given the current financial crisis that affects the EU states. Hence the idea of this community project difficult to apply, according to which banking supervision should be integrated at European Union level, not only in the euro area and allowed not only at national level. It is about integrated supervisory mechanisms, monitoring and intervention in the banking area and last, but not least it is about the financial transactions tax. The sovereign debt crisis, that includes one by one the European Union countries, requires even more a change of the European banking construction, an institutional reorganization, new community institutions, new financial banking principles, applying across the whole European Union. Regardless of the time horizon, it is essential for this new bank building to be completed by the levers and resources necessary to intervene in case of financial shortfalls.

JEL Codes: E5

Keywords: monitoring; coordination; liabilities; risks; mechanisms

1. Introduction

The main reason for instituting the idea of the European Banking Union's constitution would be to break the negative feedback between the public and the banking sector, which was one of the main catalysts for the economic crisis in Europe that started in 2009. Its basic elements are: creating a common framework for monitoring (common rules), shared deposit insurance, an ordered bankruptcy mechanism and a common fund (permanent) - ESM (European Stability Mechanism). Now it is already clear that these elements will be gradually implemented. Whatever the period of application, it is essential for the supervision of the banks in Member States to be completed with the levers and resources necessary to intervene in case of bank failures.

The measure of common deposit insurance should be implemented by the regulatory authority that would therefore target the protection of depositors by guaranteeing (up to a certain amount) the partial or full redemption of the value of deposits in case of the bank's insolvency risk. By this, the reimbursement would be done from a deposit insurance fund, financed in advance by the banks themselves. The mechanism designed for ordered bankruptcy is suggested to include standardized procedures in case of a bank's failure. In most European countries, there has not been, until now, a special law for bankruptcy during a crisis. An orderly and efficient liquidation of an insolvent bank is essential to prevent the widespread contamination during a crisis. Multinational banks complicate, to a certain extent, the situation as the group's subsidiaries are subject to the bankruptcy laws from their country of origin.

In the new European Banking Union, the European Central Bank will provide oversight for all the banks in The Single Supervisory Mechanism as of March 1, 2014 or 12 months after the entry into force of the Regulation. In the case of some direct recapitalization situations of certain banks, by the European Stability Mechanism, these terms can be surpassed for the ECB to supervise quickly those credit institutions. The ECB will also have the flexibility to extend the deadlines for implementation of The Unique Monitoring Mechanism, if, following some evaluation, it is not ready to take over supervision.

2. Constraints in the Process of Institutionalizing the European Banking Union

The concept surrounded by many uncertainties regarding the manner in which, throughout the European Union or the euro area only, and the actual impact, is worth analyzing in the context where the application of such a project would mean an important step towards greater integration at various levels and would modify the role of national central banks. …

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