So far national governments have saved numerous banks from bankruptcy. This was the only way to prevent a collapse of the financial sector with unforeseeable consequences for the real economy. In the final analysis though, it is tax-payers who are paying for the mistakes of the banks. To ensure that this does not happen again in future, European Union member states have launched a number of measures under the overall banner of a ‘Banking Union’.

The Banking Union has three main elements: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the harmonisation of deposit guarantee schemes.

Translating European provisions into practice

The Cabinet has now approved two bills to translate into law the European Banking Union provisions:

• The Law to Implement the European Bank Recovery and Resolution Directive (BRRD). This will give the resolution authority the right to bail in the owner and creditors of an institute. This regulation complements intervention and resolution instruments already in place in national law. The national resolution authority in Germany is the Federal Agency for Financial Market Stabilisation (FMSA).

• The draft Law on the Transfer of Contributions. This bill regulates the transfer of bank levies raised at national level to the Single Resolution Mechanism and the joint use of these contributions. The Single Resolution Mechanism can finance future resolution measures.

Two more bills lay the foundations for the direct recapitalisation of banks by the European Stability Mechanism (ESM).

• The modifications to the European Stability Mechanism Financing Law and of the financial assistance instruments aim to enable Germany to approve the introduction of a new European Stability Mechanism Instrument for direct bank recapitalisation. This will allow the European Stability Mechanism to offer direct support to distressed banks. The precondition is that the affected member states cannot do so themselves through their national budget.

Strictly regulated – direct recapitalisation of banks

The heads of state and government of euro-zone states agreed in a statement issued in June 2012 that the instrument of direct recapitalisation of banks should be available in November 2014 when the European Central Bank (ECB) assumes responsibility for banking supervision.

The direct recapitalisation of banks is only possible on the basis of existing treaty regulations, i.e. an application must have been lodged by a member state. And funding will only be approved under strict conditions. There can only be direct recapitalisation by the European Stability Mechanism once shareholders and creditors have been extensively bailed in.

Much remains to be done

Across Europe work is continuing on the Banking Union. Preparatory work for a Single Supervisory Mechanism is progressing at top speed, to ensure that the European Central Bank can assume its responsibilities on the agreed date. Major progress has also been made on reviewing banks.

Important steps must now be taken to implement the Single Resolution Mechanism. As of 2016 a European banking fund is to be in place. The precise form to be taken by the bank levy must still be decided, but Germany is working to ease the burden on smaller banks, while the too large to fail banks pay more.

Work on the harmonisation of national provisions to guarantee savers’ deposits too is progressing. All EU member states are required to set up deposit guarantee schemes to be financed by the banks. This will guarantee bank deposits up to a ceiling of 100,000 euros. The deposit guarantee systems in Germany will remain in place. There are no plans for a Europe-wide deposit guarantee scheme.