# EUR-Lex - 52012DC0510 - EN

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# 52012DC0510

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL A Roadmap towards a Banking Union /* COM/2012/0510 final - 2012/ () */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT AND THE COUNCIL

A Roadmap towards a Banking Union

1.
Introduction

Over the past four years, the
EU has responded decisively to the economic and financial crisis. Significant improvements have been made to the
Economic and Monetary Union (EMU), and a substantial financial reform agenda is
being implemented, fulfilling commitments made in the G20 in response to the
financial crisis, and to make financial institutions and markets more stable,
more competitive and more resilient[1].

Completing this reform of the
EU regulatory framework is essential but will not be sufficient to successfully
address significant threats to financial stability across the Economic and
Monetary Union. Further steps are needed to tackle the specific risks within
the Euro Area, where pooled monetary responsibilities have spurred close
economic and financial integration and increased the possibility of
cross-border spill-over effects in the event of bank crises, and to break the
link between sovereign debt and bank debt and the vicious circle which has led
to over €4,5 trillion of taxpayers money being used to rescue banks in the EU.
Coordination between supervisors is vital but the crisis has shown that mere
coordination is not enough, in particular in the context of a single currency
and that there is a need for common decision-making. It is also important to
curtail the increasing risk of fragmentation of EU banking markets, which
significantly undermines the single market for financial services and impairs
the effective transmission of monetary policy to the real economy throughout
the Euro Area.

The
Commission has therefore called[2]
for a banking union to place the banking sector on a more sound footing and
restore confidence in the Euro as part of a longer term vision for economic and
fiscal integration. Shifting the supervision of banks to the European level is
a key part of this process, which must subsequently be combined with other
steps such as a common system for deposit protection, and integrated bank
crisis management. The report by the Presidents of the European Council, the
Commission, the Eurogroup and the European Central Bank (ECB) of 26 June 2012[3]
endorsed this vision. For its part, the European Parliament has recommended
steps in the same direction, for example in its report from July 2010 on
cross-border crisis management in the banking sector[4]. This was also
confirmed by the Euro Area Summit of 29 June 2012[5].

Ensuring that bank supervision
and resolution across the Euro Area meets high standards will reassure citizens
and markets that a common, high level of prudential regulation is consistently
applied to all banks. If banks get into difficulties in the future, the public
should have the confidence that ailing banks will be restructured or closed
while minimizing costs for the taxpayer. This future system will help build the
necessary trust between Member States, which is a pre-condition for the
introduction of any common financial arrangements to protect depositors and
support orderly resolution of failing banks.

This communication accompanies
two legislative proposals, respectively for the setting up of a single
supervisory mechanism by conferring specific tasks on the ECB concerning
policies relating to the prudential supervision of credit institutions and for
adaptations to the Regulation setting up the European Banking Authority (EBA)[6]. These
legislative proposals mark a first important step which will make a qualitative
improvement in financial stability and confidence in the Euro Area in
particular. This communication sets the single supervisory mechanism in context
and indicates further work towards a banking union beyond these first
proposals.

2.
The banking union and the single market

The single market for financial
services is based on common rules which ensure that banks
and other financial institutions which under the Treaty enjoy rights of free
establishment and free provision of services are subject to equivalent rules
and proper supervision across the EU.

The creation of the banking
union must not compromise the unity and integrity of the single market which
remains one of the greatest achievements of European integration. Indeed, the
banking union rests on the completion of the programme of substantive regulatory
reform underway for the single market (the "single rulebook").

The single market and the
banking union are thus mutually reinforcing processes. Work to strengthen the
single market must continue across all existing areas covered by Commission proposals.

Moreover, in three areas of
specific relevance to the banking union, this work should be accelerated and
agreement between the co-legislators on the relevant proposals reached before
the end of 2012:

–
Stronger
prudential requirements for banks have been proposed. With its proposals on
bank capital requirements ("CRD4")[7], the Commission
launched the process of implementing the new global standards on bank capital
and liquidity. The creation of the single supervisory mechanism should not
require substantive changes to the proposed regulation and directive, although
in a limited number of areas, some fine-tuning may be required to reflect the
new situation. During the final stages of the CRD4 negotiations, the Commission
will pay particular attention to ensure that the texts agreed are technically
compatible with the proposed Regulation setting up the single supervisory
mechanism, and will work with the European Parliament and the Council in this
perspective. This will include in particular ensuring that all provisions of
the proposed CRD4 Directive are operational for application both at national
level and by the ECB.

–
The
coverage of national Deposit Guarantee Schemes (DGS) has already been raised to
a harmonised level of €100,000 per depositor, per institution, effective as of
31 December 2010. In July 2010, the Commission proposed[8]
going further, with the harmonisation and simplification of protected deposits,
faster pay-outs and improved financing, notably through the ex-ante funding of
deposit guarantee schemes paid for by contributions from banks and a mandatory
borrowing facility between national schemes within certain fixed limits.

–
The
Commission's proposal on recovery and resolution tools for banks in crisis,
adopted on 6 June 2012[9],
is the last in a series of proposed measures to strengthen Europe's banking
sector and to avoid the spill-over effects of any future financial crisis with
negative effects on depositors and taxpayers. To ensure that financial
stability is upheld while bank shareholders and creditors bear their full share
of bank losses and recapitalisation costs, the Commission has proposed a common
framework of rules and powers. This will help Member States prevent bank crises
from emerging in the first place and, if such bank crises still emerge, to
manage them in a more orderly and effective way. Member States would be
required to establish an ex-ante resolution fund paid for by contributions from
banks, and provision is made for a mandatory borrowing facility between
national schemes, again subject to clear limits.

These rules will therefore
constitute a common foundation across the single market on which the banking
union proposals can build. This single rulebook is needed for the stability and
integrity of the EU's internal market in financial services. It provides a
common foundation which allows a move to the banking union without any risk of fragmenting
the single market. Swift delivery of the outstanding reforms on capital
requirements, deposit guarantee schemes, and bank resolution by the
co-legislators by the end of the year, is therefore paramount.

These rules also have to be
applied in the same way across the whole Union, through coherent and convergent
supervision of credit institutions by national supervisors and the ECB. The
European Banking Authority (EBA) has a crucial role in delivering this
objective, in particular, by the set of instruments and powers provided by its
founding regulation (addressing breaches of Union law, mediation, binding
technical standards, guidelines, and recommendations). It is therefore critical
that the EBA plays fully its role to build a common legal framework and
supervisory culture across the whole Union.

Moreover, in order to avoid any
divergence between the Euro Area and the rest of the EU, the single rulebook
should be underpinned by uniform supervisory practices. Different supervisory
handbooks and supervisory approaches between the Member States participating in
the single supervisory mechanism and the other Member States pose a risk of
fragmentation of the single market, as banks could exploit the differences to
pursue regulatory arbitrage. The EBA should develop a single supervisory
handbook to complement the single rulebook.

Any measures adopted by the ECB
– for example to spell out further details on how prudential supervision is
carried out in the context of the specific supervisory structure created by the
single supervisory mechanism – must be in line with the single rulebook
including the technical standards set out by delegated acts adopted by the
European Commission. Finally, it should be noted that today's proposal
maintains the current balance between home and host Member States, including as
regards participation in supervisory colleges.

The effective impact and
implications of the single supervisory mechanism on the operational functioning
of the EBA will be further examined in the forthcoming review on the
functioning of the European Supervisory Authorities to be presented by the
Commission by 2 January 2014[10].
In that context, the Commission will in particular examine whether the role of
the EBA with regard to stress testing exercises needs to be strengthened, to
avoid making the authority too dependent on information and contributions by
those authorities competent for assessing the effective resilience of the banking
sector across the Union.

In parallel, the Commission
will continue to strengthen financial stability and ensure a level playing
field in the EU single market for banking through its control of state aid and
conditionality for economic adjustment aid.

Key actions The Commission calls on the European Parliament and the Council to reach agreement by end-2012 on: (i) the CRD4 proposals, making them applicable both across the single market and within the context of the single supervisory mechanism; (ii) the proposal for a Directive on Deposit Guarantee Schemes as proposed by the Commission; (iii) the proposal for a Directive on bank recovery and resolution.

3.
Completing the banking union

As set out by the Commission[11] before the
June 2012 European Council and in the report of the Presidents of the European
Council, the Commission, the Eurogroup and the European Central Bank of 26 June
2012[12],
completing the banking union will require further work to deliver a single
supervisory mechanism, a common system for deposit guarantees and an integrated
crisis management framework. The establishment of the single supervisory
mechanism is a crucial and significant first step.

3.1.
A Single Supervisory Mechanism

The single supervisory
mechanism which the Commission is proposing today is based on the transfer to
the European level of specific, key supervisory tasks for banks established in
the Euro Area Member States. While retaining ultimate responsibility, the ECB
would carry out its tasks within the single supervisory mechanism composed of
the ECB and national supervisory authorities. This structure will provide
strong and consistent supervision across the Euro Area, while making best use
of the local and specific know-how of national supervisors. This will ensure
that supervision remains highly aware of all national and local conditions
relevant for financial stability. The Commission also proposes a mechanism
which will allow Member States which have not adopted the Euro, but would like
to participate in the single supervisory mechanism, to cooperate closely with
the ECB.

Under the single supervisory mechanism,
the ECB will become responsible for supervising all banks within the banking
union, to which it will apply the single rulebook applicable across the single
market. Recent experience has shown that difficulties, even in relatively small
banks, can have significant negative impacts on the financial stability of
Member States. Therefore, from the first day, the ECB will be empowered to take
over the supervision of any bank in the Euro Area if it so decides, in
particular if the bank is receiving public support. For all other banks, ECB
supervision will be phased in automatically: on 1 July 2013 for the most
significant European systemically important banks, and on 1 January 2014 for
all other banks. Therefore, by 1 January 2014 all banks in the Euro Area will
come under European supervision.

The ECB will be granted key
specific supervisory tasks which are indispensable to ensure detection of risks
threatening the viability of banks. It will be empowered to require banks to
take the necessary remedial action. The ECB will, inter alia, be the competent
authority for authorizing credit institutions, assessing qualifying holdings,
ensuring compliance with the minimum capital requirements, ensuring the
adequacy of internal capital in relation to the risk profile of a credit
institution ("Pillar 2 measures"), conducting supervision on a
consolidated basis and supervisory tasks in relation to financial
conglomerates. The ECB will also ensure compliance with provisions on leverage
and liquidity, apply capital buffers and carry out, in coordination with
resolution authorities, early intervention measures when a bank is in breach
of, or is about to breach, regulatory capital requirements.

The ECB will be vested with the
necessary investigatory and supervisory powers to perform its tasks. Active
involvement of national supervisors within the SSM is provided for to ensure
the smooth and efficient preparation and implementation of supervisory
decisions as well as the necessary coordination and information flow regarding
issues of both local and European reach, in order to ensure financial stability
across the Union and its Member States.

All tasks not explicitly
conferred upon the ECB will remain with national supervisors. For example,
national supervisors will remain in charge of consumer protection and the fight
against money laundering, and of the supervision of third country credit
institutions establishing branches or providing cross-border services within a Member State.

The ECB
must be able to carry out its new supervisory functions in full independence
whilst being fully accountable for its actions. The Commission proposal
contains strong accountability safeguards, notably vis-à-vis the European
Parliament and the Council, to ensure democratic legitimacy. In addition, the
proposal lays down a number of organisational principles to ensure clear
separation between monetary policy and supervision. This will mitigate
potential conflicts between different policy objectives, while at the same time
allowing full advantage to be taken of synergies. All preparatory activities
and policy execution will therefore be carried out by bodies and administrative
divisions separate from monetary policy functions through a supervisory board
established within the ECB for this express purpose.

Finally,
the proposed amendments of the EBA Regulation will ensure that the EBA can
continue to fulfil its mission effectively as regards all Member States. In
particular, EBA will exercise its powers and tasks also vis-à-vis the ECB.
Voting arrangements within the EBA will be adapted to ensure EBA
decision-making structures continue to be balanced and effective reflecting the
positions of the competent authorities of Member States participating in the
single supervisory mechanism and those which do not, and thereby preserving
fully the integrity of the single market. Amendments
of voting arrangements have been targeted to those areas where the EBA takes
binding decisions on the application of the single rulebook when pursuing
breaches of law and settling disagreements. In other areas, existing procedural
safeguards are considered sufficient to ensure balanced and effective decisions
making in those areas. For example, draft technical standards are submitted to
the Commission for adoption, and the Commission can decide not to endorse or to
modify them, in particular when they are not in full conformity with the
fundamental principles of the internal market for financial services. Finally,
a targeted review clause has been inserted in the draft Regulation amending
Regulation 1093/2010 so as to take into account
in particular any developments in the number of Member States whose currency is
the Euro or whose competent authorities have entered into a close cooperation
and examine whether in light of such developments any further adjustments of
those provisions are necessary to ensure that EBA decisions are taken in the
interest of maintaining and strengthening the internal market for financial
services.

Key Actions The Commission calls: (i) on the Council to consider and adopt urgently the proposal for a Council Regulation conferring specific tasks on the ECB concerning policies relating to the prudential supervision of credit institutions taking into account the opinion of the European Parliament; (ii) on the European Parliament and the Council to consider and adopt urgently the proposal amending Regulation 1093/2010 establishing the EBA. Agreement on these two proposals should be reached before the end of 2012.

3.2.
Next Steps in the Management of Bank Crises

Global financial
integration and the EU single market have enabled the banking sector in some
Member States to outgrow national GDP many times over, resulting in
institutions which are "too-big-to-fail" and
"too-big-to-save" under existing national arrangements. On the other
hand, experience shows that the failure of even relatively small banks may
cause cross-border systemic damage. Furthermore, bank runs across borders can
critically weaken national banking systems, further damaging the fiscal standing
of the sovereign, and hastening funding problems for both.

Reinforced
supervision within the banking union will help improve the robustness of banks.
If a crisis nonetheless occurs it is necessary to ensure that institutions can
be resolved in an orderly manner and that depositors are assured their savings
are safe.

Against this
background, the Commission has underlined[13] that a banking union should include
a more centralised management of banking crises. The European Parliament has
also called for progress in this area. The need for "common mechanisms to
resolve banks and guarantee customer deposits" was also referred to in the
report by the Presidents of the European Council, the Commission, the Eurogroup
and the European Central Bank of 26 June 2012[14].

Therefore, the
Commission envisages notably making a proposal for a single resolution
mechanism which would govern the resolution of banks and coordinate in
particular the application of resolution tools to banks within the banking
union. This mechanism would be more efficient than a network of national
resolution authorities, in particular in the case of cross-border failures,
given the need for speed and credibility in addressing banking crises. It would
be a natural complement to the establishment of a single supervisory mechanism.
It would also entail significant economies of scale, and avoid the negative
externalities that may derive from purely national decisions. It would take its
decisions in line with the principles of resolution set out in the single
rulebook which are consistent with international best practice and in full
compliance with Union state aid rules. In particular shareholders and creditors
should bear the costs of resolution before any external funding is granted, and
private sector solutions should be found instead of using taxpayers' money.

Moreover, and based
on an assessment of its functioning, such a single resolution mechanism could
also be entrusted with further tasks of coordination regarding the management
of crisis situations and resolution tools in the banking sector, as set out in
the report presented in June 2012 by the Presidents of the European Council,
the Commission, the ECB and the Eurogroup.

Key actions Once agreement on the existing DGS and Bank Recovery and Resolution proposals is achieved, the Commission envisages to propose notably a single resolution mechanism to resolve banks and to coordinate the application of resolution tools to banks under the banking union.

4.
Next steps

The European Union has the means
to address its current weaknesses and set up the banking union as an essential
step towards a genuine Economic and Monetary Union.

The Commission calls on the
European Parliament and the Council to:

–
give their full support to the banking union and
endorse the orientations and roadmap described in this Communication;

–
give the highest priority in the legislative
process to the actions necessary for establishing the banking union;

–
finalise, as soon as possible and in any case
before the end of the year, the proposals on the table on:

–
Deposit Guarantee Schemes;

–
access to the activity of credit institutions
and the prudential supervision of credit institutions and investment firms
(CRD);

–
prudential requirements for credit institutions
and investment firms (CRR);

–
a framework for the recovery and resolution of
credit institutions and investment firms;

–
conferring certain tasks on the ECB relating to
the prudential supervision of credit institutions;

–
amending certain provisions of the EBA
Regulation.

With this communication and the
accompanying legislative proposals, the Commission has acted swiftly and
responsibly in response to the mandate given by the European Council and the
Heads of State and Government of the Euro area at the end of June. Other
institutions now need to do their part to ensure the single supervisory
mechanism is established by 1 January 2013.

[1] http://ec.europa.eu/internal_market/finances/policy/map_reform_en.htm

[2]
http://ec.europa.eu/commission_2010-2014/president/news/archives/2012/06/20120626_speeches_2_en.htm

[3] http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131201.pdf

[4] European Parliament resolution of 7 July 2010 with recommendations
to the Commission on Cross-Border Crisis Management in the Banking Sector
(2010/2006(INI))

[5] "The Commission will present Proposals on the basis of Article
127(6) for a single supervisory mechanism shortly. We ask the Council to
consider these Proposals as a matter of urgency by the end of 2012. When an
effective single supervisory mechanism is established, involving the ECB, for
banks in the euro area the ESM could, following a regular decision, have the
possibility to recapitalize banks directly. This would rely on appropriate
conditionality, including compliance with state aid rules, which should be
institution specific, sector-specific or economy-wide and would be formalised
in a Memorandum of Understanding".  http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131359.pdf

[6] Regulation (EU) No 1093/2010

[7] http://ec.europa.eu/internal_market/bank/regcapital/new_proposals_en.htm

[8] http://ec.europa.eu/internal_market/bank/docs/guarantee/200914_en.pdf

[9] http://ec.europa.eu/internal_market/bank/crisis_management/index_en.htm

[10] Pursuant to Article 81 of the Regulations establishing the European
Supervisory Authorities [Regulation (EU) No 1093/2010, Regulation (EU) No
1094/2010, and Regulation (EU) No 1095/2010]

[11] http://ec.europa.eu/europe2020/banking-union/index_en.htm

[12] http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131201.pdf

[13] http://ec.europa.eu/europe2020/banking-union/index_en.htm

[14] http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131201.pdf