In June 2012, the European Council decided to create a banking union that would allow for centralised supervision and resolution for banks in the euro area. The intention was to ensure that banks are stronger and better supervised and, should problems arise in the financial sector, they can be resolved more easily and without using taxpayers' money.
The banking union (pdf) is made up of a Single Supervisory Mechanism and a Single Resolution Mechanism, both of which are mandatory for all euro area member states and open to all other countries in the EU.
There is also a set of common rules for banks in all EU member states, known as the single rulebook.
Single Supervisory Mechanism
The Single Supervisory Mechanism (SSM) became operational in November 2014. Under the SSM, the European Central Bank (ECB) is the banking supervisor for all banks in the euro area and is directly responsible for supervising the approximately 123 largest banking groups. The national supervisors, such as the Central Bank of Ireland, continue to monitor the remaining banks.
The main tasks of the ECB and the national supervisors, working closely together, are to check that banks comply with the EU banking rules and to tackle problems early on.
Single Resolution Mechanism
While the role of the SSM is to make bank failures less likely, the role of the Single Resolution Mechanism (SRM) is to ensure an orderly resolution of failing banks with minimal costs for taxpayers and to the real economy.
The SRM covers banks overseen by the SSM. It has been operational since the beginning of 2015 and will be fully operational (with a complete set of resolution powers) from January 2016.
The SRM is made up of a board, the Single Resolution Board and a fund, the Single Resolution Fund.
Single Resolution Board
Once informed by the ECB that a bank is in trouble, the Single Resolution Board (SRB) is responsible for taking most decisions on the best course of action and preparing for the resolution of the failing bank. The Board is also responsible for managing the Single Resolution Fund.
Single Resolution Fund
The Single Resolution Fund (SRF) is financed by all the banks in the banking union countries. For situations when the SRF is not sufficiently funded by the banking sector, a backstop will be developed, which will facilitate borrowing by the SRF. The euro area banking sector will ultimately be liable for the SRF repayments by means of levies.
Both the supervisory and resolution mechanisms are underpinned by a set of common rules known as the single rulebook. The single rulebook is the foundation of the banking union. It consists of a set of legislative texts that all financial institutions in the EU must comply with. These rules, among other things, lay down capital requirements for banks, ensure better protection for depositors, and regulate the prevention and management of bank failures.