COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on completing the Banking Union
Date: 2017-10-11
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: Economic and Monetary Union, banking, economic policy, economic recovery, euro, euro area, financial control, financial policy, single market

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 11.10.2017  COM(2017) 592 final   COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS on completing the Banking Union  
 
 
COMMUNICATION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE 
EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

on completing the Banking Union 

"Democracy is about compromise. And the right compromise makes winners out of everyone 
in the long run. A more united Union should see compromise, not as something negative, but 
as the art of bridging differences. Democracy cannot function without compromise. Europe 
cannot function without compromise."  

Jean-Claude Juncker, State of the Union Address, 13 September 2017 

2 

 
 
 
 
 
 
 
 
 
1. Background and objectives 

As  highlighted  by  President  Juncker  in  his  State  of  the  Union  Address  on  13  September 
2017,1 the Banking Union must be completed if it is to deliver its full potential as part of a 
strong  Economic  and  Monetary  Union  (EMU).  Together  with  the  Capital  Markets  Union 
(CMU), a complete Banking Union will promote a stable and integrated financial system in 
the  European  Union.  It  will  increase  the  resilience  of  the  Economic  and  Monetary  Union 
towards adverse shocks by substantially facilitating private risk-sharing across borders, while 
at the same time reducing the need for public risk-sharing.  

This is a matter on which there is broad support and consensus in the European Union. In the 
Conclusions  on  a  Roadmap  to  complete  the  Banking  Union  from  June  2016  (hereafter  the 
‘2016 Council Roadmap’) and in the Annual Report on Banking Union of March 20162 both 
the  Council  and  the  European  Parliament  reaffirmed  the  importance  of  the  Banking  Union 
with a view of its completion.  

It  is  now  time  to  seize  the  political  momentum  –  reflected  not  least  by  the  invitation  by 
President Tusk to the Euro Summit in an inclusive format in December – and transform this 
widely  shared  ambition  into  concrete  action,  completing  the  Banking  Union  by  2019,  as 
called  for  already  by  the  2015  Five  Presidents  Report3  and  the  Reflection  paper  on  the 
deepening  of  the  Economic  and  Monetary  Union  (hereafter  the  ‘Economic  and  Monetary 
Union reflection paper’)4.  

The  financial  and  sovereign  debt  crises  experienced  in  the  European  Union  during  the  last 
decade showed that the European Union’s incomplete economic and financial framework was 
not sufficient to prevent the emergence of unsustainable policies during the boom years or to 
allow  negative  shocks  to  be  effectively  absorbed  during  the  subsequent  macro-economic 
correction phase. In particular, the crises revealed the existence of undesirable links between 
national banking sectors and their sovereigns – the so-called doom loop. The Banking Union 
was created to break that link and avoid that taxpayers are first in line to bail out ailing banks.  

Common  supervision,  crisis  management  and  deposit  insurance  will  allow  for  deeper 
financial  integration  underpinned  by  a  stable  financial  system.  This  will  reinforce  financial 
stability,  both  within  the  Member  States  participating  in  the  Banking  Union  and  in  the 
European Union as a whole. Ultimately, a more stable banking sector will also mean greater 
financing  opportunities  for  companies  of  all  sizes  and  more  jobs  and  growth  for  European 
citizens. Deeper financial integration is also key to provide a wider choice of services at lower 
prices. In order to make the benefits of integration tangible for European citizens, as set out in 

1 https://ec.europa.eu/commission/state-union-2017_en: "If we want banks to operate under the same rules and 
under the same supervision across our continent, then we should encourage all Member States to join the 
Banking Union. We need to reduce the remaining risks in the banking systems of some of our Member States. 
Banking Union can only function if risk-reduction and risk-sharing go hand in hand. As everyone well knows, 
this can only be achieved if the conditions, as proposed by the Commission in November 2015, are met. There 
can only be a common deposit insurance scheme once everyone will have done their national homework".   
2 See EP, Banking Union – Annual Report 2016, available at 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+TA+P8-TA-2017-
0041+0+DOC+PDF+V0//EN. 
3 The Five Presidents’ Report: Completing Europe's Economic and Monetary Union, 2015, available at: 
https://ec.europa.eu/commission/sites/beta-political/files/5-presidents-report_en.pdf.  
4 COM(2017) 291 of 31 May 2017, https://ec.europa.eu/commission/sites/beta-
political/filespublications/reflection-paper-emudeepening-economic-and-monetary-union_en.pdf 

3 

 
 
                                                            
the Consumer Financial Services Action Plan5, the Commission is also considering to propose 
amendments to the Regulation on cross-border payments6 to reduce charges for cross-border 
banking transactions in all European Union currencies.  

The prospect  of further Member States  joining  the Banking Union and the euro area  makes 
the  completion  of  the  Banking  Union  even  more  compelling.  An  Economic  and  Monetary 
Union  that  is  stable,  both  economically  and  financially,  and  attractive  also  to  other,  non-
participating  Member  States,    is  a  major  instrument  to  facilitate  broader  economic  and 
financial stability, and thus achieve the European Union's objective of improving the lives of  
European  citizens.  In  this  context,  the  Commission  welcomes  the  discussions  in  Denmark, 
Sweden  and  Bulgaria  about  the  possibility  to  join  the  Banking  Union.  To  facilitate  such 
process, all institutional and regulatory elements of the Banking Union should be put in place 
as  rapidly  as  possible.  Several  key  elements  of  the  Banking  Union  are  already  established: 
First,  the  Single  Rulebook  provides  a  single  set  of  harmonised  prudential  rules  that  credit 
institutions must respect in the Single Market. The Banking Union is firmly anchored on this 
basis,  which  applies  in  all  Member  States.  Second,  all  banks  in  the  European  Union  are 
supervised according to the same standards, with the most significant banks in the euro area 
being centrally supervised by the European Central Bank (ECB) in its supervisory capacity in 
the  framework  of  the  Single  Supervisory  Mechanism  (SSM).  Third,  in  the  case  of  failure, 
banks  can  be  resolved  centrally  and  according  to  the  same  standards  within  the  Single 
Resolution  Mechanism  (SRM),  which  is  backed  by  a  Single  Resolution  Fund  (SRF).  The 
establishment  of  this  new  architecture  for  the  Banking  Union  has  been  accompanied  by  a 
comprehensive asset-quality review, stress test and recapitalisation exercises for participating 
banks in 2014. Thus, the institutional and regulatory framework for European banks has been 
fundamentally  reinforced,  resulting  in  a  substantial  reduction  of  risks  in  the  banking  sector. 
During the last few years, banks' capitalisation levels have starkly increased: the reduction of 
the  leverage  across  all  European  Union  and  euro  area  banks  is  possibly  the  clearest 
demonstration of the current robustness of the banking sector and of the market buy-in to the 
supervisory  and  regulatory  reforms  that  Europe  has  put  forward  and  implemented  with 
determination.  

5 Communication from the Commission to the European Parliament, the Council, the European Central Bank, 
the European Economic and Social Committee and the Committee of the Regions, Consumer Financial Services 
Action Plan: Better Products, More Choice, COM/2017/0139 final.  
6 Regulation (EC) No 924/2009 of the European Parliament and of the Council of 16 September 2009 on cross-
border payments in the Community and repealing Regulation (EC) No 2560/2001, OJ L 266, 9.10.2009, p. 11. 

4 

 
 
                                                            
Banks' leverage 

European Union

Euro area

25

20

15

10

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Mar
2017

Source: European Central Bank 

Experience  to  date  suggests  that  the  completed  parts  of  the  Banking  Union  are  functioning 
well.  Today,  the  Commission  is  publishing  its  first  review  of  the  Single  Supervisory 
Mechanism,  which  shows  that  the  establishment  of  the  Single  Supervisory  Mechanism  was 
overall  successful.  The  Single  Resolution  Mechanism  is  also  up  and  running  and  has 
successfully  managed its first bank resolution  case, with no cost for tax payers. This shows 
that the new system is able to manage a bank resolution efficiently and in a very short period 
of time, while at the same time allowing for different crisis management options, as provided 
for in the legal framework. This allows the specific situation of individual banks to be taken 
into account, which is particularly important given that there are still significant legacy issues 
in parts of the European Union banking sector and not all elements of the Banking Union are 
fully phased in.  

Experience from recent cases will help all the involved actors to further improve the practical 
application of the European Union rules and the functioning of the system. This concerns for 
example  the  practical  modalities  of  cooperation  and  exchanging  information  between  all 
European  and  national  bodies  involved  in  early  intervention  and  resolution,  the  procedures 
leading  to  a  decision  whether  or  not  a  bank  is  failing  or  likely  to  fail  and  the  use  of  asset 
quality  reviews  in  order  to  determine  whether  the  conditions  for  a  precautionary 
recapitalisation  are  met.  Also  of  concern  is  the  rapid  build-up  of  adequate  bail-inable 
liabilities  (in  the  form  of  Minimum  Requirement  for  own  funds  and  Eligible  Liabilities  – 
MREL), which is crucial to facilitate the resolution of non-viable distressed banks and which 
could  be  further  built  up  in  the  current  market  conditions.  Improvement  also  concerns  the 
issue of ensuring that the necessary liquidity is available before, during and after resolution so 
as to apply, in the latter case, the most appropriate resolution tools even in the absence of an 
immediate  private  buyer  for  a  failing  bank.  Importantly,  the  current  experience  with  the 
Banking Union framework also shows the importance of ensuring that financial instruments 
which  are  likely  to  suffer  losses  in  a  banking  crisis  are  held  and  losses  borne  by  private 
investors who are sufficiently informed to understand the risks involved.  

While  a  number  of  practical  improvements  can  be  made  in  the  short  term  by  the  relevant 
actors,  other  issues  can  only  be  fully  tackled  once  all  the  agreed  elements  of  the  Banking 
Union are being fully phased in and the Banking Union is completed.  

In  this  context,  a  single  European  Deposit  Insurance  Scheme  (EDIS)  remains  one  of  the 
missing  pieces.  All  depositors  within  Banking  Union  should  enjoy  the  same  level  of 

5 

 
 
 
protection. In this way, the European Deposit Insurance Scheme would underpin stability in 
the  banking  sector  by  providing  strong  and  uniform  insurance  coverage  for  all  such 
depositors, independent of their geographical location in the Banking Union.  

The  Banking  Union  also  still  lacks  an  effective,  common  backstop.  The  creation  of  such  a 
backstop for the Single Resolution Fund was agreed by Member States already nearly 4 years 
ago, in 20137. It needs to be made operational now so as to reinforce the overall credibility of 
the bank resolution framework within the Banking Union. It is essential that actions taken by 
the Single Resolution Board enjoy the absolute confidence of all parties concerned if the key 
objectives  of  resolution  in  terms  of  maintaining  financial  stability  and  minimising  costs  to 
taxpayers are to be fully achieved. Together with the application of other resolution tools (i.e. 
bail-in, availability of the Single Resolution Fund), access to a last-resort common backstop 
should  serve  to  provide  such  confidence.  This  would  include,  for  example,  using  common 
funding  in  combination  with  the  European  Central  Bank  instruments  to  cover  liquidity 
shortfalls and have more time to look for the best buyer of a bank in a specific situation.  

At  the  same  time,  while  important  progress  has  been  made  and  as  highlighted  by  President 
Juncker in his State of the Union Address on 13 September 2017, efforts to further reduce risk 
and improve risk management in banks must continue. The Banking Union can only function 
if  risk  reduction  and  risk  sharing  go  hand  in  hand.  A  number  of  initiatives  with  the  aim  of 
achieving  this  goal  are  under  negotiation  by  the  European  Parliament  and  the  Council:  In 
November  2016,  the  Commission  adopted  a  comprehensive  legislative  package  of  risk 
reduction  measures  to  further  strengthen  the  resilience  of  European  Union  banks8,  some  of 
which are subject to fast-track negotiations in the European Parliament and the Council.  

Despite  the  progress  made  on  risk  reduction,  the  Banking  Union  is  still  young.  Many  risks 
now visible in banks’ balance sheets accumulated before the creation of the Banking Union, 
when supervision and resolution were exclusively under national responsibility. These legacy 
issues must be addressed convincingly if the European Union is to proceed quickly towards 
the  completion  of  the  Banking  Union.  One  of  the  challenges  that  remains  is  to  decisively 
continue the recent trend of reducing the high levels of non-performing loans (NPLs) in parts 
of the banking sector. A lot has been done as a consequence of market forces and regulatory 
measures,  which  have  already  delivered  results.  However,  the  competitiveness  of  some 
European banks and their ability to lend to the economy is hampered. The Commission will 
continue to support this process through the adoption of further measures to reduce the level 
of  Non  Performing  Loans.  Risks  in  the  European  banking  system  also  need  to  be  further 
reduced  through  a  further  loosening  of  the  interconnection  between  banks  and  their  “home 
country”, which has been one of the main objectives of the Banking Union from its inception. 
With supervision and resolution of larger and systemic banks now conducted centrally and no 
longer  at  national  level,  helping  banks  to  geographically  diversify  their  investments  in 
sovereign  bonds  would  further  weaken  the  bank-national  sovereign  link  and  thereby 
strengthen  the  sharing  of  cross-border  risk  via  the  private  sector.  While  the  Banking  Union 
contributes  to  enhanced  financial  stability,  it  is  also  expected  to  deliver  economic  benefits 
through  more  integration  of  the  European  banking  sector  and  through  a  geographically 

7 See Economic and Financial Affairs Council Conclusions of 18 December 2013, 8 December 2015 and 17 June 
2016.  
8 http://europa.eu/rapid/press-release_IP-16-3731_en.htm. Further initiatives of the Commission aim at resilient, 
recoverable and resolvable market infrastructures, in particular in relation to central counterparties, http://eur-
lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52016PC0856, http://eur-lex.europa.eu/legal-
content/EN/TXT/?uri=CELEX:52017PC0331.   

6 

 
 
                                                            
diversified asset allocation. To this end, the Commission will continue to work on deepening 
the Banking Union with the objective of recognising it as a single jurisdiction.  

The The 2015 Commission Communication "Towards the completion of the Banking Union" 
(hereafter  "2015  Commission  Communication")    and  the  2016  Council  Roadmap9  have 
identified the key steps and, where necessary, the Commission presented legislative proposals 
in  2015  and  2016.  It  is  now  time  for  the  European  Parliament  and  Member  States  to  take 
political responsibility and agree on the necessary legal acts to complete the Banking Union 
by 2019.  

If European Union leaders collectively lack action and ambition in the year ahead, due to the 
political calendar, there is a real risk that the European Union will remain for years without a 
perspective  of  completing  the  Banking  Union,  and  with  suboptimal  levels  of  ambition  as 
regards  the  finalisation  of  the  risk  reduction  and  risk  sharing  processes.  The  current 
momentum, following the State of the Union Address, must be used to not let this happen. To 
strengthen shock absorption through private channels in the Economic and Monetary Union, 
the European Union must find a win-win equilibrium, with a high level of ambition as regards 
both risk reduction and risk sharing.  

This Communication attempts to set out an ambitious, but realistic path on how an agreement 
on  completing  the  Banking  Union  can  be  achieved,  based  on  existing  commitments  by  the 
Council.  Building  on  the  significant  progress  already  achieved,  the  necessary  measures  to 
complete the Banking Union must be agreed by the end of 2018, while the full application of 
certain elements will take more time and may be phased-in gradually.  

The  Commission  will  issue  in  December  2017,  a  comprehensive  package  of  measures  to 
strengthen  Economic  and  Monetary  Union.  A  strong  commitment  and  decisive  actions  to 
complete the Banking Union, as set out in this Communication, are an integral part of these 
efforts.  

2. Risk reduction through the November 2016 Banking Package  

2016 Council Roadmap 

Status 

Next steps 

a.  Propose 

to 

Capacity 

reviewing 

the 
amendments 
legislative  framework  in  view  of 
the  Total  Loss 
implementing 
(TLAC) 
Absorbing 
standard 
the 
and 
for  own 
requirement 
minimum 
funds  and  eligible  liabilities.  The 
to  ensure 
Council  will 
consistent 
adequate 
amounts  for  the  bail-inable  buffers 
that  contribute  to  an  efficient  and 
orderly  resolution  process  in  line 
with 
the  Bank  Recovery  and 
Resolution  Directive  (BRRD)  for 
all credit institutions for which bail-
in would be the validated resolution 
strategy. 

rules 

seek 

and 

Legislative  proposal,  including  all 
measures  indicated  by  the  2016 
Council  Roadmap, 
under 
negotiation. 

is 

Agreement  among  co-
legislators 
the 
legislative  proposal  by 
mid-2018 at the latest 

on 

On options and national discretions 
the  Capital  Requirements 
in 
Requirements 
Directive/Capital 
Regulation, 
the 
to 
legislative  proposal,  the  European 
Central  Bank  has  undertaken  a 
to 
comprehensive 
harmonise them. 

in  addition 

exercise 

9 http://www.consilium.europa.eu/en/press/press-releases/2016/06/17-conclusions-on-banking-union/ 

7 

 
 
 
 
 
                                                            
b.  Put  forward  a  proposal  on  a  common 
approach 
creditor 
the 
hierarchy, to enhance legal certainty in 
case of resolution. 

bank 

to 

c.  Propose  amendments  to  the  Capital 

RequirementsDirective/ 
Capital Requirements Regulation IV as 
part  of  an  overall  review  exercise, 
which would result in: 

i. 

ii. 

or 

harmonisation 
further 
specification  of  options  and  national 
discretions  granted 
to  Member 
States, which could also contribute to 
the  objective  of  reducing  financial 
fragmentation; 
ii. 
finalising 
remaining  Basel  reforms  including 
the  introduction  of  a  leverage  ratio, 
possibly  set  higher  than  3%  for 
systemic  banks,  and  the  introduction 
of a net stable funding ratio. 

implementing 

and 

The November 2016 Banking  Package proposed by the Commission will fulfil many of the 
objectives  set  out  in  the  2016  Council  Roadmap  in  terms  of  further  risk  reduction  in  the 
banking sector. This package, which is currently being negotiated in the European Parliament 
and  the  Council,  builds  on  existing  European  Union  banking  rules  and  completes  the  post-
crisis  regulatory  agenda  by  making  sure  that  the  regulatory  framework  addresses  any 
outstanding challenges to financial stability, while ensuring that banks can continue to support 
the  real  economy.  The  Commission  proposals10  will  strengthen  the  European  Union  rules 
requiring  banks  to  build  up  buffers  of  liabilities  that  can,  if  necessary,  be  bailed  in,  by 
implementing  the  Total  Loss  Absorbing  Capacity  standard  of  the  Financial  Stability  Board 
and  integrate  it  into  the  existing  rules  on  the  Minimum  Requirement  for  own  funds  and 
eligible liabilities; and by providing for harmonised rules on where debt instruments eligible 
to  meet  the  Total  Loss  Absorbing  Capacity  /  Minimum  Requirement  for  own  funds  and 
Eligible Liabilities buffers stand in the bank creditor hierarchy. Recent experience has shown 
again  how  important  it  is  that  banks  hold  appropriate  buffers  of  liabilities  –  available  to  be 
bailed-in – held by investors with appropriate knowledge about the risks involved, in order to 
manage crises without impact on financial stability and without having tax payers first in line 
to bear the costs. The Commission proposals also provide for harmonised rules concerning the 
application of moratorium tools applied by supervisors and resolution authorities to stabilise 
banks,  which  are  equally  important  based  on  recent  experience.  Moreover,  the  amendments 
proposed  by  the  Commission  provide  for  harmonisation  of  remuneration  rules,  which  have 
been  found11  to  overall  contribute  to  curbing  excessive  risk-taking  and  better  aligning 

10 In addition to the elements mentioned in 2016 Council Roadmap, the Commission proposals also introduce 
new rules in areas of market risk, counterparty credit risk, large exposures and for exposures to central 
counterparties (CCPs). 
11 Report from the Commission to the European Parliament and the Council, Assessment of the remuneration 
rules under Directive 2013/36/EU and Regulation (EU) No 575/2013, COM(2016) 510 final. 

8 

 
 
 
 
 
                                                            
remuneration with performance, thereby contributing to enhanced financial stability.  

Finally,  the  Banking  Package  proposes  to  implement  a  number  of  international  standards, 
including the introduction of a leverage ratio and a Net Stable Funding Ratio (NSFR), and the 
Commission  remains  committed  to  close  international  cooperation  on  banking  regulatory 
matters, as well as to the implementation of agreed standards, and is following closely their 
implementation in other jurisdictions.  

The  Commission  is  aware  that  its  proposals  to  allow  supervisors  to  waive  certain 
requirements on a standalone basis for subsidiaries of cross-border groups, which is a logical 
step  of  the  Banking  Union  and  the  Single  Market,  is  met  with  significant  concerns  by  a 
number of Member States. The Commission is willing to engage in constructive discussion on 
this  matter,  with  a  view  to  facilitate  finding  a  solution  that  preserves  the  benefits  of  the 
proposal  while  taking  into  account  the  need  for  an  acceptable  home-host  balance  in  an 
appropriate way.  

With  a  view  to  swift  progress  and  reach  an  as  rapid  adoption  as  possible,  the  European 
Parliament  and  the  Council  are  encouraged  to  maintain  the  clearly  defined  scope  of  the 
package. Further outstanding issues beyond the scope of the package, could be considered in 
later  legislative  reviews,  once  the  ongoing  negotiations  on  the  2016  Banking  Package  are 
concluded.  

3. Moving forward towards a European Deposit Insurance Scheme (EDIS)  

2016 Council Roadmap 

Status 

Next steps 

Continue  constructive  work  at 
technical 
level.  Negotiations  at 
political  level  will  start  as  soon  as 
sufficient further progress has been 
made  on  the  measures  on  risk 
reduction. 

Technical work is ongoing but with 
limited political progress. 

Political  negotiations  must  now  be 
started with a view to agreement as 
rapidly as possible in the course of 
2018. 

The  2015  Five  Presidents’  Report  identified  a  European  Deposit  Insurance  Scheme  as  an 
essential step to complete the Banking Union. As subsequently recalled in the Economic and 
Monetary Union Reflection paper, it remains a priority to ensure the stability of the European 
Union  banking  system  and  the  functioning  of  the  internal  market  in  banking  services.  By 
reducing depositors' vulnerability to large local shocks (for which national deposit guarantee 
schemes  have  more  limited  financial  means)  and  the  link  between  banks  and  their  home 
sovereign,  a  European  Deposit  Insurance  Scheme  would  increase  the  resilience  of  the 
Banking  Union  against  future  financial  crises  by  providing  strong  and  uniform  insurance 
coverage  for  all  depositors  independently  of  their  geographical  location  within  the  Banking 
Union.  

The  proposal  put  forward  by  the  Commission  in  November  201512  provides  a  very 
comprehensive solution to achieve these goals through the progressive transfer, according to a 

12 https://ec.europa.eu/info/business-economy-euro/banking-and-finance/banking-union/european-deposit-
insurance-scheme_en.  

9 

 
 
 
 
                                                            
defined  timeline  (which  should  have  started  in  2017),  of  funds  and  of  the  management  of 
payout  events  to  the  European  Deposit  Insurance  Scheme  from  national  Deposit  Guarantee 
Schemes. Such central fund with an enhanced financial capacity would be better equipped to 
deal with bank failures. At the same time, the misalignment of centralised bank supervision 
and resolution in the Banking Union, on the one hand, and national deposit insurance, on the 
other hand, would be overcome.13  

While  the  ambition  of  the  Commission  remains  strong,  discussions  in  the  European 
Parliament  and  the  Council  have  revealed  divergent  positions  as  regards  the  design  of  the 
system at its final stage (re-insurance, co-insurance or full insurance), the timing of the setting 
up of such a system, and the different degree of legacy issues and moral hazard risks present 
in  the  various  national  banking  systems.  Concerns  have  been  expressed  about  the  need  to 
ensure  that  banks  are  sufficiently  robust  on  a  standalone  basis,  before  sharing  the  potential 
burden of bank failures within the Banking Union.  

The 2016 Council Roadmap confirmed that the Council would continue constructive work at 
technical level and that negotiations at political level would start as soon as sufficient progress 
had been achieved on risk reduction measures.  

Two years after the presentation of the European Deposit Insurance Scheme proposal, which 
remains on the table unchanged, the time has definitively come to move ahead, since without 
the European Deposit Insurance Scheme, the Banking Union may still be vulnerable to future 
crises. To reinvigorate the negotiations, it could for example be considered by the European 
Parliament  and  the  Council,  in  the  current  negotiations,  to  introduce  the  European  Deposit 
Insurance Scheme in a more gradual manner, commensurate to progress achieved with regard 
to risk reduction and the tackling of legacy issues, starting  with a more limited re-insurance 
phase and moving gradually to co-insurance.  

In  a  first  re-insurance  phase,  the  European  Deposit  Insurance  Scheme  could  provide  only 
liquidity coverage, and no loss coverage.  

In  case  of  a  default  of  a  bank,  national  Deposit  Guarantee  Schemes  would  have  to  deplete 
their  funds  first  before  a  possible  intervention  by  the  European  Deposit  Insurance  Scheme. 
The European Deposit Insurance Scheme would only provide liquidity to the national Deposit 
Guarantee  Schemes  (which  is  in  reality  a  loan  since  it  should  be  fully  recovered  from  the 
banking sector afterwards) and would cover up to 30% of liquidity shortfall in the first year 
(2019), 60% in the second year (2020) and 90% in the third year (2021).14 The rest would be 
covered  by  national  Deposit  Guarantee  Schemes  with  the  resources  not  transferred  to  the 
European  Deposit  Insurance  Scheme  during  this  phase  or  via  ex-post  contributions  from 
banks.  By  leaving  losses  to  be  covered  nationally  and  providing  liquidity  assistance  for 
national schemes if needed, this solution would on the one hand ensure depositor protection 
from the beginning (for which liquidity is needed) and, on the other hand, take into account 
legacy and moral hazard concerns.  

The joint  Deposit Insurance Fund (DIF),  managed under the auspices of the existing Single 
Resolution Board and financed by contributions from banks would be built-up gradually.  

13 Also the Effects analysis, available at https://ec.europa.eu/info/publications/effects-analysis-european-deposit-
insurance-scheme-edis_en. 
14 See table 1. 

10 

 
 
                                                            
Another idea for consideration could be that at the end of the re-insurance phase, the move to 
the co-insurance phase would not be automatic, but be contingent on a set of conditions. To 
address concerns related to legacy risks and moral hazard, the start of the co-insurance phase, 
and therefore the access to loss coverage by the European Deposit Insurance Scheme, could 
be  linked  to  conditions  to  be  assessed  by  a  Commission  decision,  which  would  include  a 
targeted Asset Quality Review (AQR) to address Non Performing Loans and Level III assets15 
followed  by  the  solution  of  the  problems  identified  (e.g.  active  portfolio  reductions).  Such 
Asset Quality Review should be conducted during the re-insurance phase (i.e. before 2022 at 
the  latest),  to  ensure  that  legacy  risks  are  addressed  within  the  banking  sectors  where  they 
were generated before the start of the co-insurance phase, based on the significant progress in 
tackling  legacy  assets  that  is  being  made  and  is  expected  to  continue.  This  second  phase 
would  start  only  once  such  conditions  are  met.  For  instance,  as  regards  the  Asset  Quality 
Review,  a  threshold  could  be  set  (e.g.  a  certain  level  of  Non  Performing  Loans  ratios  and 
Level  III  assets)  and  banks  not  meeting  the  threshold  would  be  required  by  supervisory 
authorities to prepare appropriate strategies on these issues.   

The  actions  envisaged  by  the  Commission  and  in  the  European  Union  Action  Plan  on  Non 
Performing  Loanss  (see  section  5)  will  facilitate  the  implementation  of  such  individual 
strategies.  

Once these conditions are met and the co-insurance (second phase) has started, the European 
Deposit  Insurance  Scheme  would  also,  in  addition  to  full  liquidity  coverage,  progressively 
cover  losses  provided  that  all  conditions  are  continuously  met.  Regarding  losses,  national 
Deposit Guarantee Schemes and the European Deposit Insurance Scheme would contribute in 
parallel from the first euro of losses, according to a key which would develop progressively, 
starting with a 30% European Deposit Insurance Scheme contribution as of the first year of 
the co-insurance phase.  

This would effectively address concerns related to legacy risks and moral hazard, while still 
ensuring full liquidity and losses coverage by the European Deposit Insurance Scheme at the 
final  stage.  It  would  make  any  move  to  loss  coverage  by  the  European  Deposit  Insurance 
Scheme contingent on Member States addressing legacy issues, provide the relevant Member 
States  with  adequate  time  to  take  necessary  measures  and  ensure,  in  its  final  stage,  that  the 
European Deposit Insurance Scheme provides the strongest protection for depositors and, at 
the same time, safeguards for financial stability. A single European Union fund is superior in 
terms of risk absorption capacity and of breaking the sovereign-bank loop than any national 
system.  The  central  fund  administration  would  also  ensure  a  more  rapid  and  efficient 
management of default cases, which could better cope with crisis situations.  

Some  additional  aspects  have  also  emerged  during  the  negotiations  of  the  2015  European 
Deposit  Insurance  Scheme  proposal  with  regard  to  some  of  the  options  and  discretions 
included  in  the  Deposit  Guarantee  Scheme  Directive  that  could  be  included  also  in  the 
European Deposit Insurance Scheme (e.g. scope of the European Deposit Insurance Scheme, 
target level, use of Deposit Insurance Fund funds for alternative measures). These matters will 
have  to  be  considered  taking  into  account  the  fact  that  in  a  common  system  of  deposit 
insurance,  all  participants  will  be  affected  by  the  way  these  options  and  discretions  are 
implemented. Hence, a balanced solution must be reached that takes account of national and 

15 Assets which are typically very illiquid, and their valuation cannot be determined by using observable 
measures such as market prices or models. 

11 

 
 
                                                            
regional specific characteristics, while ensuring equal treatment for all participating banks that 
contribute to the European Deposit Insurance Scheme.   

The  Commission  stands  ready  to  actively  discuss  as  soon  as  possible  the  above-mentioned 
ideas with the European Parliament and Council, within the framework of the negotiations of 
its proposal.  

In the transition to the European Deposit Insurance Scheme co-insurance phase, there is scope 
for further improvements with regard to the coordination among national Deposit Guarantee 
Schemes  and  a  more  coherent  implementation  of  rules.  The  Deposit  Guarantee  Scheme 
Directive16  adopted  in  2014  has  enhanced  the  functioning  of  national  Deposit  Guarantee  
Schemes  and  offers  better  protection  to  depositors  through  a  harmonised  coverage  of 
depositors across the European Union and a shortened time-limit for payouts. As indicated in 
the  2015  Commission  Communication,  accompanying  the  European  Deposit  Insurance 
Scheme proposal, harmonisation of national deposit schemes needs to advance in parallel with 
the establishment of the European Deposit Insurance Scheme to ensure the correct functioning 
of  that  Scheme  17.  Some  important  differences  remain  across  Member  States  in  the 
implementation  of  the  Deposit  Guarantee  Scheme  Directive  rules,  for  example  on  the 
conditions to declare deposits unavailable, the eligibility of deposits, the financing of Deposit 
Guarantee Schemes or the use of Deposit Guarantee Scheme funds. For the Banking Union, 
greater  harmonisation  of  these  differences  is  needed  since  they  will  be  financed  through  a 
common  fund  to  which  all  banks  in  the  Banking  Union  will  contribute  but  greater 
harmonisation will also be for the benefit of the internal market as a whole.  

The  exchange  of  information  and  instruments  to  promote  coordination  among  national 
Deposit  Guarantee  Schemes  need  also  to  be  improved  because    for  the  European  Deposit 
Insurance  Scheme  to  work  properly,  national  competent  authorities  and  Deposit  Guarantee 
Schemes will have to coordinate among themselves and with the Single Resolution Board, in 
some  circumstances  within  very  tight  deadlines.  The  powers  entrusted  to  the  Single 
Resolution Board by the European Deposit Insurance Scheme proposal are not general, do not 
encompass certain aspects related to deposit insurance activities which are relevant to perform 
its  tasks  (e.g.  declaration  of  deposits  as  unavailable)  and  are  limited  to  Member  States 
participating in the Banking Union. Adjustments to the Deposit Guarantee Schemes Directive 
are needed to facilitate cross-border  interventions by such Schemes, foster convergence and 
improve the exchange of information among national Deposit Guarantee Schemes, competent 
authorities,  the  Single  Resolution  Board  and  the  European  Banking  Authority  (EBA).  The 
European Banking Authority, the authority in charge of safeguarding the integrity, efficiency 
and  orderly  functioning  of  the  banking  sector  across  all  Member  States,  shall  be  given  the 
powers to assist in and promote such processes. This will enhance deposit protection within 
the internal market and, as a consequence, facilitate the functioning of the European Deposit 
Insurance  Scheme.  Better  cooperation  and  exchange  of  information  between  national 
authorities  and  the  Deposit  Guarantee  Schemes  from  different  Member  States,  through  the 
European  Banking  Authority,  will  also  smoothen  the  interaction  with  national  Deposit 
Guarantee  Schemes  and  national  authorities  of  non-Banking  Union  Member  States  and  the 
European Deposit Insurance Scheme, as well as the accession of non-euro Member States to 
the European Deposit Insurance Scheme.   

16https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-
management/managing-risks-banks-and-financial-institutions/deposit-guarantee-schemes_en.  
17 http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0587&from=EN. 

12 

 
 
                                                            
Filling  this  gap  will  also  align  the  architecture  of  the  three  pillars  of  the  Banking  Union 
(supervision,  resolution  and  deposit  insurance)  since  in  all  three  there  will  be  an  European 
Union  central  institution  or  an  agency  (the  European  Central  Bank,  the  Single  Resolution 
Board  and  the  European  Deposit  Insurance  Scheme,  respectively)  in  charge  of  the 
implementation  and  an  European  Union  agency  (the  European  Banking  Authority) 
coordinating national authorities operating in their respective fields.  

Finally,  the  harmonisation  of  some  national  options  and  discretions  set  out  in  the  Deposit 
Guarantee Schemes Directive, will contribute to further reducing financial fragmentation and 
simplifying the coordinating role played by the European Deposit Insurance Scheme and the 
European Banking Authority.  

4. Completing a backstop to the Banking Union 

2016 Council Roadmap 

Status 

Next steps 

Technical  work 
November 2016. 

started 

in 

Political  negotiations  should  be 
finalised by 2018. 

Takes  note  of  the  intention  of 
Member  States  to  start  work  in 
September  2016  if  and  when  all 
participating  Member  States  have 
fully transposed the Bank Recovery 
and Resolution Directive.  

Reaffirms  the  need  to  have  the 
common backstop fully operational 
at  the  latest  by  the  end  of  the 
the  Single 
transition  period  of 
Resolution 
ealier 
or 
Fund, 
depending  on  progress  with  risk 
reduction measures. 

When  the  Single  Resolution  Mechanism  was  set  up,  Member  States  agreed  to  develop  a 
common  backstop  to  the  Single  Resolution  Fund,  which  should  be  fiscally  neutral  over  the 
medium term as contributions would be recouped by way of contributions from the banking 
sector. It was also agreed that this backstop had to be fully operational at the latest after ten 
years18.  

Although the European supervision and resolution frameworks have significantly reduced the 
likelihood and potential impact of bank failures, the need to access a common fiscal backstop 
to  enhance  the  financial  capacity  of  the  Single  Resolution  Fund  for  coping  with  bank 
resolutions  cannot  be  entirely  ruled  out.  The  main  objective  of  such  a  backstop  is  to  instill 
confidence  in  the  banking  system  by  underpinning  the  credibility  of  actions  taken  by  the 
Single Resolution Board and ensuring that those actions enjoy absolute confidence among all 
parties  concerned.  As  a  last  resort  tool,  it  would  only  be  activated  in  case  the  Single 

18 Statement of Eurogroup and Economic and Financial Affairs Council Ministers on the Single Resolution 
Mechanism backstop, 18 December 2013. 

13 

 
 
 
 
 
 
 
                                                            
Resolution  Fund’s  immediately  available  resources  prove  to  be  insufficient  for  capital  or 
liquidity purposes. 

It  remains  equally  important  that  there  is  sufficient  liquidity  available  for  systemic  banks 
facing  problems  in  resolution,  to  ensure  that  bank  depositors,  as  well  as  other  stakeholders 
and  the  market  overall,  are  sufficiently  resilient.  Without  prejudice  to  the  availability  of 
liquidity from central bank operations and in combination with them, the mechanism should 
be sufficiently robust and with a capacity large enough to reassure bank stakeholders and the 
overall market that it can contribute to possible liquidity needs of a bank facing adversity.  

The  Economic  and  Monetary  Union  reflection  paper  identifies  certain  criteria  that  the 
backstop should meet to be operational in the event of a crisis: it should be of an adequate size 
to be able to fulfil its role; activated in a swift manner which is essential in times of crisis; and 
fiscally  neutral    given  that  the  Single  Resolution  Mechanism  Regulation  stipulates  that  the 
banking  industry  repays  any  potential  disbursements  from  the  Single  Resolution  Fund.  No 
room  should  remain  for  national  considerations  or  segmentation.  The  financial  and 
institutional architecture should ensure full efficiency in achieving the backstop's  objectives. 
The  Economic  and  Monetary  Union  reflection  paper  identified  a  credit  line  from  the 
European Stability Mechanism (ESM) as the most effective option.  

It is  equally  important that the  backstop  ensures  equivalent rights  and  obligations  across  all 
participating Member States of the Banking Union regardless of whether they are member of 
the  euro  area  or  not.  This  will  ensure  that  the  Banking  Union  continues  to  be  open  for 
participation of all Member States, in principle as well as in practice. In addition, the existing 
concept of conditionality for stability support from the European Stability Mechanism would 
need  to  be  adjusted  for the  backstop  function,  taking  into  account  that  in  the  context  of  the 
Banking Union, incentives for banks to act prudently and reform where necessary are already 
provided through the tools of the single rule book, of single supervision and single resolution.  

Work on the common backstop has started, and the 2016 Council Roadmap indicated that the 
backstop  may  become  operational  ahead  of  the  end  of  the  transition  period,  subject  to 
progress being made on risk reduction measures.  

The Commission will continue to insist that the backstop must become operational as rapidly 
as possible. Against that background, the Commission supports the ongoing work of the Task 
Force on Coordinated Action (TFCA) with regard to a credit line from the  European Stability 
Mechanism, work that should be pursued as a matter of priority. This work stream will need to 
be articulated with the Commission's forthcoming package of proposals for the deepening of 
the Economic and Monetary Union, which will include a proposal to transform the  European 
Stability Mechanism into a European Monetary Fund, within the framework of Union law. In 
this context, it will also be important to ensure an efficient decision-making process that will 
allow for a swift deployment of the backstop, in those last resort situations where this might 
become necessary.  

14 

 
 
 
 
 
 
 
 
 
5. Additional new measures: Actions to address Non-Performing Loans 

2016 Council Roadmap 

Status 

Next steps 

legislative  proposal 

for 
Propose  a 
minimum  harmonisation  in  the  field  of 
insolvency  law  in  the  context  of  the 
Capital  Markets  Union,  which  may also 
support  efforts  to  reduce  levels  of  Non 
Performing Loans. 

for  new 
Legislative  proposal 
approach  on  business  insolvency 
under negotiation19. 

Agreement among co-legislators 
on  the  legislative  proposal  by 
end of 2018. 

Implementation  of 
the  2017 
Council  Action  Plan  on  Non 
Performing Loans. 

In addition to the actions envisaged in the 2016 Council Roadmap to complete the Banking 
Union, a number of significant additional measures have been envisaged during the last year 
that  will  further  reduce  risks  in  the  Banking  Union.  Since  the  adoption  of  the  2015 
Commission Communication and the 2016 Council Roadmap, the need to focus risk reduction 
efforts  on  Non  Performing  Loans  has  become  increasingly  clear.  Non  Performing  Loans 
weigh on the profitability and viability of affected banks and thereby constrain those banks' 
ability to lend and might ultimately hamper economic growth. It is a good sign that levels of 
Non  Performing  Loan  are  going  down.  Even  in  the  most  affected  Member  States,  levels  of 
Non Performing Loan have been materially reduced. This trend should be accelerated, and the 
build-up of new Non Performing Loans must be prevented.  

While  Member  States  and  banks  themselves  have  a  primary  responsibility  in  tackling  Non 
Performing Loans, integrating national and European Union level efforts is warranted to make 
an  impact  on  Non  Performing  Loan  stocks  and  prevent  the  future  build-up  of  new  Non 
Performing Loans on banks’ balance sheets. This work can usefully build on the significant 
attention that has already been dedicated for several years to the workout of Non Performing 

19 http://ec.europa.eu/information_society/newsroom/image/document/2016-48/proposal_40046.pdf. 

15 

 
 
 
 
 
 
 
                                                            
Loans. Since the outset of the financial crisis, the Commission has incentivised banks, via its 
State-aid control,  to  manage and  reduce  their impaired assets via market mechanisms rather 
than  shifting  the  burden  to  tax  payers.  For  ailing  banks  whose  viability  was  threatened  by 
those impaired assets, the Commission has assisted Member States in setting up ad-hoc and 
system-wide  measures  with  the  objective  of  reducing  banks'  Non  Performing  Loan  stocks 
(sometimes  as  part  of  a  financial  assistance  programme)  through  solutions  compatible  with 
State  aid  rules20.  The  need  to  take  determined  action  to  address  Non  Performing  Loans  has 
also  been  underlined  in  the  European  Semester  recommendations  to  relevant  Member 
States.21  Banking  supervisors  have  played  a  decisive  role  in  enhancing  the  reporting  and 
supervision  of  Non  Performing  Loans  in  Europe.  Work  in  this  area  must  be  based  on  a 
comprehensive approach combining a mix of complementing policy actions, at national level 
and  at  Union  level  where  appropriate,  involving  actions  in  four  areas:  (i)  supervision,  (ii) 
reform  of  restructuring,  insolvency  and  debt  recovery  frameworks,  (iii)  development  of 
secondary markets for distressed assets, and (iv) fostering restructuring of the banking system. 
Addressing remaining risks in the European banking sector is of the greatest importance and 
the  Commission  is  committed  to  take  the  necessary  measures  within  its  remit  to  continue 
driving this process forward.  

As one important measure to deal with Non Performing Loans, the Commission presented in 
November 2016, in the context of the Capital Markets Union work, a legislative proposal on 
business insolvency, restructuring and second chance22. The key features of this proposal, in 
particular the availability  of  restructuring  procedures  enabling viable companies in financial 
difficulties  to  avoid  insolvency  as  well  as  measures  to  enhance  the  effectiveness  of 
restructuring  and  insolvency  proceedings,  would  contribute  to  reducing  Non  Performing 
Loans as well as preventing their accumulation in the future. Swift progress by the European 
Parliament and the Council on this file is encouraged and necessary and should be a priority. 
The  Council  Action  Plan  on  Non  Performing  Loans  issued  in  July  201723  goes  beyond  the 
commitments  on  risk  reduction  set  out  in  the  2016  Council  Roadmap  and  includes  specific 
steps different actors must take to reduce the risk to financial stability due to Non Performing 
Loans, both by tackling the legacy Non Performing Loans and reducing the risk of build-ups 
of  Non  Performing  Loans  in  the  future.  The  Commission  welcomes  this  comprehensive 
approach which is consistent with its own longstanding calls to tackle Non Performing Loans 
and will swiftly take the necessary actions within its remit of competence.  

The measures set out in the Action Plan represent a significant step forward on risk reduction, 
additional  to  the  ones  agreed  in  the  Council  Roadmap  of  2016.  Progress  in  this  area  would 
support  the  completion  of  the  Banking  Union  by  removing  legacy  risks  from  the  European 

20 These measures included transfer of Non Performing Loans to asset management companies (such as in 
Ireland, Spain and Slovenia). They were associated with recapitalisation aid to the banks. In all those cases, 
state-aid was approved by the Commission under the European Union State aid framework, which require in-
depth restructuring and adequate burden sharing. For the banks whose viability could not be restored, other 
measures approved under state aid rules included specific bank actions like orderly liquidation plans approved by 
the Commission under state aid rules, which entailed a reduction of the Non Performing Loan stock present in 
the banking sector. Finally, more recently, the Commission also facilitated the setting up of state aid free 
schemes, such as schemes to facilitate the securitisation of Non Performing Loans. 
21 See most recently Commission Communication 2017 European Semester: Country-specific recommendations, 
COM(2017) 500 final of 22 May 2017. 
22 Proposal for a Directive on preventive restructuring frameworks, second chance and measures to increase the 
efficiency of restructuring, insolvency and discharge procedures and amending Directive 2012/30/EU, 22 
November 2016, COM(2016) 723 final. 
23 Action Plan To Tackle Non-Performing Loans In Europe; http://www.consilium.europa.eu/en/press/press-
releases/2017/07/11-conclusions-non-performing-loans/. 

16 

 
 
                                                            
banking sector and will render European banks more stable and competitive. The Commission 
will therefore move quickly with these measures.  

As  a  first  step,  the  Commission  is  clarifying  in  the  Single  Supervisory  Mechanism  Review 
Report, accompanying this Communication, the interpretation of the relevant Articles of the 
Capital  Requirement  Directive  (CRD)  and  the  Single  Supervisory  Mechanism  Regulation. 
The  Commission  is  confirming  that  the  supervisory  powers  enshrined  therein  allow  the 
competent authorities to influence a bank's provisioning policy with regard to Non Performing 
Loans  within  the  limits  of  the  applicable  accounting  framework  and  to  apply  specific 
adjustments where necessary for prudential purposes.  

By Spring 2018, the Commission will adopt a comprehensive package of measures to address 
Non  Performing  Loans  and  a  first  Report  on  the  implementation  of  the  Action  Plan.  This 
package will consist of the following measures:  

-  A  Blueprint  for  how  national  Asset  Management  Companies  (AMCs)  can  be  set  up 
within existing banking and State aid rules by building on best practices learned from 
past experiences in Member States.  

-  Measures to further develop secondary markets for Non Performing Loans, especially 
with the aim of removing undue impediments to loan servicing by third parties and the 
transfer of loans following the ongoing impact assessment.  

-  Measures  to  enhance  the  protection  of  secured  creditors  by  allowing  them  more 
efficient  methods  of  value  recovery  from  secured  loans.  Work  in  this  area  will  be 
determined by the Impact Assessment and remain consistent with and complementary to 
the Commission proposal of November 2016 for a Directive on, inter alia, preventive 
restructuring  frameworks  and  would  not  require  harmonisation  of  actual  insolvency 
provisions.  

-  In addition, since the management of Non Performing Loans would benefit from more 
efficient  and  more  predictable  loan  enforcement  and  insolvency  frameworks,  the 
Commission is also undertaking a benchmarking exercise of loan enforcement regimes 
to establish a reliable picture of the delays and value-recovery banks experience when 
faced with borrowers' defaults, and invites close cooperation from Member States and 
supervisors  to  develop  a  sound  and  significant  benchmarking  methodology.  In  this 
context, the Commission proposal for a Directive on business insolvency, restructuring 
and second chance lays down obligations on Member States to collect comparable data 
on  insolvency  and  restructuring  proceedings  and  communicate  it  to  the  Commission 
which  would  be  crucial  in  order  to  demonstrate  the  efficiency  of  the  regulatory 
framework in Member States as regards insolvent debtors.  

-  A Report, accompanied if appropriate with the necessary legislative proposals to amend 
the  Capital  Requirement  Regulation,  with  regard  to  the  possible  introduction  of 
minimum levels of provisioning which banks must make for future NPLs arising from 
newly  originated  loans,  as  requested  by  the  Council  Action  Plan.  Such  statutory  (so-
called  Pillar  1)  prudential  backstops  will  prevent  the  build-up  and  potential  under 
provisioning  of  future  NPLs  stocks  across  Member  States  and  banks  via  time-bound 
prudential  deductions  from  own  funds.  In  this  context  the  Commission  will  also 
consider  introducing  a  common  definition  of  non-performing  exposures  (NPE)  in 
accordance  with  the  one  already  used  for  supervisory  reporting  purposes24  in  order  to 

24 See Commission Implementing Regulation (EU) No. 680/2014. 

17 

 
 
  
                                                            
establish  a  sound  legal basis  for  and  ensure  consistency  in  the  prudential treatment  of 
such exposures.  

-  A  way  forward  to  foster  the  transparency  on  Non  Performing  Loans  in  Europe  by 
improving  the  data  availability  and  comparability  as  regards  Non  Performing  Loans, 
and potentially  supporting  the development by  market  participants of Non Performing 
Loan information platforms or credit registers.  

6.  Additional  new  measure:  An  enabling  framework  for  the  development  of  Sovereign 
Bond-Backed Securities (SBBS) 

2016 Council Roadmap 

- 

Status 

- 

Next steps 

In light of the work of the European 
Systemic  Risk  Board,  Commission 
may  decide 
an 
to 
enabling  framework  for  sovereign 
bond-backed securities. 

introduce 

The  objective  of  reducing  risks  to  financial  stability  by  facilitating  the  diversification  of 
banks'  sovereign  portfolios  and  further  weakening  the  bank-sovereign  nexus  is  of  high 
importance for the completion of the Banking Union. As regards the regulatory treatment of 
sovereign exposures, the Commission will come back to the issue in due course, as mentioned 
in the 2016 Council Roadmap, which agreed to await the outcomes of the Basel Committee, 
and the Reflection Paper on the Deepening of the Economic and Monetary Union.  

In order to make tangible progress on this matter, so-called sovereign bond-backed securities 
(SBBS) could as a first step have the potential to contribute to the completion of the Banking 
Union and the enhancement of the Capital Markets Union. By pooling and possibly tranching 
sovereign  bonds  from  different  Member  States,  Sovereign  Bond-Backed  Securities  could 
support further portfolio diversification in the banking sector, while creating a new source of 
high-quality  collateral  particularly  suited  for  use  in  cross-border  financial  transactions. 
Moreover, this new instrument could eliminate damaging flights away from some sovereigns, 
which  obstruct  an  economically  efficient  allocation  of  funds.  Also,  it  could  render  bonds 
issued in  otherwise small and less liquid markets more attractive for international investors. 
This would foster private-sector risk sharing and risk reduction and promote a more efficient 
allocation of risks among financial operators.  

The  Commission  is  closely  following  and  contributing  to  the  ongoing  work  on  Sovereign 
Bond-Backed Securities within the European Systemic Risk Board (ESRB). Building on the 
outcome  of  this  work,  in  December  2017  and  consultations  with  relevant  stakeholders,  the 
Commission  will consider putting forward a legislative proposal for an enabling  framework 
for the development of sovereign bond-backed securities in early 2018.  

7. Continuing to ensure high quality supervision  

The Single Supervisory Mechanism has now been fully implemented and is fully operational, 
with clear benefits in terms of level playing field and confidence emerging from the integrated 
supervision of credit institutions. The report from the Commission to the European Parliament 

18 

 
 
 
 
 
 
and the Council adopted on the same day as this Communication, highlights that the European 
Central  Bank  has  taken  up  fully  its  supervisory  role  and  has  managed  to  establish  a  good 
reputation  as  an  effective  and  rigorous  supervisory  authority  since  it  took  over  supervisory 
tasks  in  November  2014.  This  represents  a  remarkable  achievement  especially  in  a  context 
where timelines were extremely challenging and the underlying supervisory realities of the 19 
participating Member States were very diverse.  

The  functioning  of  the  Banking  Union  system  may  be  undermined  if  loopholes  in  the 
supervision emerge. Recent structural market developments show a trend for banking groups 
to  have  increasingly  complex  structures,  operating  through  entities  that  escape  bank 
supervision, but undertake largely the same activities as banks. Particularly, large investment 
firms carry out  investment banking activities similar to  those  of credit institutions that raise 
financial  stability  concerns.  As  announced  in  September  2017,25  these  concerns  will  be 
addressed  in  the  upcoming  Commission  legislative  proposals    reviewing  the  prudential 
treatment of investment firms.  

8. Way forward 

Taking into account the progress made so far and the remaining steps needed to complete the 
Banking Union, both as regards risk reduction and risk sharing measures, the path towards the 
achievement of the agreed finalisation of the Banking Union could be envisaged as follows: 

2017 

-  Agreement  by  co-legislators  on  first  items  included  in  the  2016  November 
banking  package  (International  Financial  Reporting  Standard  N.9  -  IFRS9, 
creditor  hierarchy  and  large  exposure  for  foreign  denominated  debt)  and 
significant progress on the rest of the package.  

-  Clarification  by  the  Commission  of  existing  supervisory  powers  to  address 
risks  related  to  Non  Performing  Loans  in  the  framework  of  the  Single 
Supervisory Mechanism Review Report.  

-  Commission legislative proposal regarding the investment firms review.  

2018 

-  Achievement of a European Parliament position and a Council general approach 
(Q4  2017/Q1  2018)  and  adoption  by  co-legislators  (Q2  2018)  of  the  2016 
November Banking Package.  

-  Achievement of a European Parliament position and a Council general approach 
(Q2  2018)  and  adoption  by  co-legislators  (Q4  2018)  of  the  European  Deposit 
Insurance Scheme proposal.  

-  Agreement on a common backstop (2018). 
-  Commission proposals on measures addressing issues linked to Non Performing 
Loans    (Spring  2018  –  to  be  adopted  by  co-legislators  by  early  2019  at  the 
latest). 

25 See Commission Communication on Reinforcing integrated supervision to strengthen Capital Markets Union 
and financial integration in a changing environment, 20 September 2017,  COM(2017) 542 final. 

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-  An  enabling  framework  for  the  development  of  Sovereign  Bond-Backed 

Securities (SBBSs) (early 2018). 

Spring 2019  
All  foreseen  risk  reduction  and  risk  sharing  measures  should  be  in  place  and  the 
implementation phase should start.  

9. Conclusions  

Despite  significant  progress  made  since  the  financial  crisis,  the  Banking  Union  remains 
incomplete  and  does  not  therefore  play  its  full  role  as  a  mechanism  of  shock  absorption 
through  private  channels  in  a  strong  Economic  and  Monetary  Union.  All  issues  are  well-
known and on the table for some time already. The moment to take bold but realistic actions 
is  now,  mending  the  roof  while  the  sun  is  still  shining  and  while  the  European  economy  is 
experiencing a sustained recovery. All Member States stand to lose if the current momentum 
is  not  used.  To  strengthen  shock  absorption  through  private  channels  in  the  Economic  and 
Monetary  Union,  the  European  Union  must  find  a  "win  win"  equilibrium,  delivering  with 
regard  to  risk  reduction  as  well  as  risk  sharing.  As  the  end  of  the  legislative  term  is 
approaching, clear political decisions are needed in the coming  months to ensure agreement 
on all the outstanding key elements by the end of 2018. Hence, the Commission calls upon the 
European  Parliament  and  all  Member  States  to  reach  a  political  agreement  in  the  coming 
months on a renewed commitment to complete the Banking Union by 2019. The Commission 
stands ready to actively contribute to and facilitate these discussions. 

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