Strengthening the EU's Banking Union: A Call for Cross-Border Consolidation and Regulatory Reforms

The European Union's Banking Union has been a work in progress for over a decade, with the goal of creating a more resilient and integrated financial system. However, as the European Commissioner for Financial Services, Mairead McGuinness, recently highlighted, there are still significant challenges to overcome, including the persistence of "banking nationalism" and the need for further regulatory reforms. In her speech at the EU policy think tank Bruegel, McGuinness emphasized the importance of supporting cross-border mergers of banks and addressing the risks posed by recent amendments to the draft deposit insurance rules.

Unlocking the Potential of the EU's Banking Sector

Embracing Cross-Border Consolidation

McGuinness argued that EU leaders should increase their efforts to complete the Banking Union by supporting the consolidation of banks across member states. She believes that cross-border mergers could make banks more resilient to shocks, allow for more efficient business models, and enable European banks to better compete with their non-European counterparts. By diversifying their asset portfolios and achieving greater scale, banks would be better equipped to invest in critical areas such as digitalization and cybersecurity.However, McGuinness emphasized that such consolidation should be accompanied by "appropriate safeguards" to ensure the financial stability of the EU. She also acknowledged the essential role that small and medium-sized banks continue to play in Europe's economy, and the need to strike a balance between the benefits of scale and the preservation of a diverse banking landscape.

Overcoming "Banking Nationalism"

A key obstacle to the further integration of Europe's banking sector, according to McGuinness, is the persistence of "banking nationalism" among policymakers. This residual tendency to prioritize national interests over the broader goals of the Banking Union has impeded critical investments and economic growth. The Commissioner urged policymakers to overcome this mindset and embrace the opportunities presented by cross-border consolidation.

Strengthening the Crisis Management and Deposit Insurance Framework

McGuinness also addressed the ongoing negotiations around the EU's crisis management and deposit insurance (CMDI) framework, which aims to improve the resolution process for failing banks and protect taxpayers and depositors. While she welcomed the European Parliament's position on the CMDI file, she criticized the Council's proposed amendments as "frankly very disappointing."In particular, McGuinness expressed concern that the Council's proposals would make it harder for banks to access the Single Resolution Fund, potentially incentivizing member states to continue using national tools, including taxpayer-funded bailouts, outside of the EU resolution framework. Moreover, she noted that many of the additional restrictions proposed by the Council would apply only to Banking Union members, widening the gap between member states in and outside the Banking Union and reducing the attractiveness of the Union itself.

Strengthening the Single Resolution Board

The Commissioner also warned that the Council's position would "weaken" the EU's "strong and independent" Single Resolution Board (SRB) by giving greater authority to the plenary session, which is made up of national resolution authorities, at the expense of the executive board, which consists of independent board members. This, she argued, represents a "step backwards" by "renationalizing some aspects of the Banking Union."

The Importance of Scale and Competitiveness

McGuinness's remarks come amid growing calls for EU policymakers to support the "scaling up" of European firms to allow them to compete with their US and Chinese counterparts. Former Italian Prime Minister Enrico Letta has emphasized the "stunning size deficit" of EU companies relative to their global competitors, particularly in the financial services, telecommunications, and energy sectors.Similarly, another former Italian Prime Minister, Mario Draghi, has emphasized the "crucial" importance of scale, noting that the EU's major competitors are taking advantage of their continental-sized economies to generate scale, increase investment, and capture market share. Draghi has been tasked by the European Commission to write a report on the future of the bloc's competitiveness, which is expected to delve deeper into how to enable greater scale in the European context.