Europe’s Banking Union: Still unfinished business?
The EU Banking Union, created to stabilize Europe’s financial system, remains incomplete after a decade.
In a nutshell
- Crisis management and deposit insurance face political and legal hurdles
- Banking nationalism persists, blocking market integration
- Unequal sovereign exposures risk reigniting “doom loop” vulnerabilities
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Few Europeans have heard of the Banking Union. Even fewer understand what it is meant to achieve, how it works or whether it actually works. Hardly anyone seems concerned that, despite years of hard work, it still remains incomplete.
Born in crisis
The Banking Union was launched in 2012, at a pivotal moment when the European Union faced an existential threat not only to its cohesion, but to the very survival of its single currency.
The euro crisis, also referred to as the European sovereign debt crisis, first struck smaller countries such as Greece, Cyprus, Ireland and Portugal. Massive overreactions in sovereign bond markets pushed their heavily indebted governments to the brink of default. While serious, the turmoil still seemed manageable. However, as the crisis spread to larger eurozone economies like Spain and Italy, and financial markets began to speculate about a potential breakup of the euro, the situation risked spiraling out of control.
Deep, structural weaknesses within the European banking sector further compounded the problem. The so-called “bank-sovereign nexus” – the unhealthy link and ensuing vicious cycle between banks and their home governments, also called the “doom loop” – was at the center of the storm. When the crisis struck, it became evident that banking regulation and supervision, still managed exclusively at the national level at that time, had failed disastrously.
The Banking Union was viewed as a potential lifeline to restore trust and stabilize a deeply shaken financial system. It officially came into force in 2014. More than a decade later, it remains unfinished, though not for lack of effort.
Banking Union’s stalled journey
Over the years, EU leaders have held numerous meetings on the subject. Policymakers, experts, analysts and academics have engaged in intense debates. High-level working groups have published report after report on completing the Banking Union.
A wide range of actors have been involved in shaping the deal, including heads of state in the European Council, finance ministers in the Eurogroup, negotiators from member states and policymakers from various EU institutions, including the European Parliament, the European Commission and the European Central Bank (ECB). There have been many declarations, often leading to watered-down compromises and proposals that quietly disappeared.
Yet, the mantra endures: The Banking Union must be completed. Successive commission presidents have made it a stated priority. In 2015, Jean-Claude Juncker spearheaded the preparation of the much-commented Five Presidents’ Report with that goal in mind. In 2019, his successor Ursula von der Leyen picked up the baton with equal determination. However, in 2025, the finish line appears as distant as ever.
One key reason for this ongoing deadlock is the lack of a shared understanding of what completing the Banking Union truly means in practice. The main actors remain divided even over the definition of “banking union.”
A unified framework for banking policies
To the casual observer, a banking union might suggest a fully integrated banking market: barrier-free, cross-border and driven by capital mobility, investment and innovation.
Was this not, after all, part of the Economic and Monetary Union’s (EMU) founding vision of an “ever closer union”? The EMU’s architects saw financial integration as essential to the euro’s long-term success. A monetary union, they believed, requires a banking union.
In the 15 years following the signing of the Maastricht Treaty in 1992, bank integration in the euro area had, in fact, made notable strides. But as Italian economist and former ECB Supervisory Board member Ignazio Angeloni noted, this progress unraveled during the 2008 financial crisis, and never fully recovered. Since then, banks have increasingly retreated into their national markets, scaling back cross-border activities and relationships. The pandemic, five years ago, triggered a new wave of fragmentation.
Nonetheless, a glance at the EU’s own documents shows that the Banking Union, as conceived in 2012, is less about creating a union of banking markets than establishing a union of banking-sector policies. As French economist Nicolas Veron, a leading expert on the subject, puts it, the Banking Union is essentially “a project to pool responsibility for prudential policy at European Union level.” The primary beneficiary of this transfer of authority from national to EU level has been the ECB, which has emerged significantly empowered in the process.
Officially, the Banking Union rests on three pillars: European banking supervision via the Single Supervisory Mechanism (SSM); crisis management and resolution through the Single Resolution Mechanism (SRM); and risk mutualization via the European Deposit Insurance Scheme (EDIS). While the SSM and SRM are in place, EDIS is still under construction.
Partial success
Of the three pillars, the SSM stands out as the most successful. The organization, uniting the ECB and national supervisory authorities, marked a turning point in how eurozone banks are monitored.
In late 2013, after the euro crisis, French central banker Daniele Nouy was appointed to build the new supervisory arm from scratch within the ECB. Her team faced a daunting task: to make banks in the EU safe and sound again, by force if necessary. By meticulously examining and cleaning up banks’ balance sheets, the supervisors acted with impressive efficiency to crack down on non-performing loans. By the end of 2018, when Ms. Nouy completed her five-year term as chair of the ECB Supervisory Board, euro area banks were substantially stronger than they were before the crisis.
It is said that Ms. Nouy began her mission with just a handful of collaborators on an empty floor of the ECB’s Frankfurt headquarters. A decade later, ECB Banking Supervision has 1,600 staff working alongside approximately 5,200 national supervisors across Europe. Together, they directly oversee the EU’s 114 most significant banks, which account for about 82 percent of the bloc’s banking sector by assets, and indirectly oversee all others.
Meanwhile, the SSM’s mandate has expanded broadly: It now conducts regular financial health checks and stress tests on supervised banks, performs on-site inspections, establishes additional capital buffers to mitigate financial risks, grants or withdraws banking licenses and reviews major ownership changes. Arguably, the most consequential of the ECB’s prerogatives is its authority to determine whether a bank is “failing or likely to fail.”
Banks, however, view the ECB’s supervisory arm as increasingly intrusive and costly. Stringent liquidity and capital requirements, relentless reporting obligations and ever-evolving compliance rules have become a heavy burden, further eroding their profitability, already weakened by the ECB’s years-long low-interest-rate policy.
In recent years, the complexity of EU banking legislation has reached extreme levels. To use Mr. Angeloni’s words, it has become “a labyrinth where anybody, even the most seasoned professional jurists, risks getting lost.” Ironically, over-regulation has created new fragilities in the European banking sector, undermining the very stability the Banking Union was meant to ensure.
Moreover, it remains unclear whether the SSM still possesses the same drive and effectiveness it had under Ms. Nouy, who led it with a sense of urgency. Her successor, Andrea Enria, focused on consolidating those gains with a more understated approach. Claudia Buch has led the SSM since January 2024. Undeniably, over time, the institution has evolved into a sprawling bureaucracy. Hence, it is at risk of the usual ailments: inertia, procrastination and complacency.
The two weak pillars
Experts agree that the Banking Union’s other two pillars – the SRM and EDIS – leave much to be desired.
According to Mr. Veron, the common claim that the second pillar is “fully formed and functional” is overstated. Progress in building a coherent crisis management and resolution framework has been slow, inconsistent and often inadequate. The SRM’s handling of several failing banks, particularly in Italy and Spain, has been criticized for falling short of its mandate to ensure orderly resolutions “with minimal costs to taxpayers and the real economy.”
Moreover, the Single Resolution Board (SRB), established by the SRM Regulation in 2014 as the EU’s central resolution authority, represents another step in the Banking Union’s broader process of “agencification,” which continues to raise unresolved legal, constitutional and accountability issues.
The Bank Recovery and Resolution Directive (BRRD), adopted the same year, and introducing a so-called bail-in principle to shift losses to private stakeholders rather than public funds, has not worked as expected either. Even after revisions, it remains controversial. Some member states still believe that ailing banks should be rescued with public funds rather than private savings. As a result, the EU’s post-crisis vision of enforcing private sector liability in the banking system is unlikely to become a reality anytime soon.
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Then there is the third, still missing, pillar, the long-delayed EDIS, intended to guarantee uniform deposit protection across the eurozone. While today, deposits up to 100,000 euros are legally protected, this safeguard is implemented at the national level. EDIS would mutualize or share risk across borders. However, this is a red line for countries like Germany, which strongly opposes covering losses from bank failures in countries such as Italy, Spain or Greece. Proposed a decade ago, the legislation is stalled in negotiations, with little prospect of progress soon.
What if the entire three-pillar narrative was misleading? Mr. Veron argues that treating issues like resolution and deposit insurance as separate concerns, when they are deeply interconnected, is becoming increasingly unhelpful. However, policymakers still seem reluctant to move beyond this ingrained bias.
Scenarios
Unlikely: Meaningful progress on the Banking Union in the foreseeable future
The Banking Union may have successfully established Europe-wide banking supervision, but it falls short of a robust crisis intervention framework. The project not only suffers from a technocratic and somewhat flawed design, but its progress is significantly hindered by persistent political disunity within the EU, especially on critical issues such as EDIS.
A similar outlook applies to the Capital Markets Union (CMU), a related initiative designed to support the Banking Union. Launched in 2015 to improve access to funding and bolster Europe’s economic competitiveness, the CMU has also stalled. Its prospects for becoming fully operational in the near term are equally grim, mainly due to similar structural, regulatory and political obstacles.
The absence of effective risk-sharing mechanisms – both in banking and capital markets – not only restricts private investment across borders but also limits the EU’s capacity to respond effectively to future shocks.
Equally unlikely: Full integration of the European banking market
As Mr. Angeloni points out, the EU’s Banking Union, primarily conceived as a prudential project, has largely hindered the development of a true single market for banking products and services. By imposing stringent prudential requirements, particularly on cross-border bank mergers, it becomes more difficult for banks to achieve the scale necessary for expansion abroad. In any case, we are far from witnessing the unified, competitive and dynamic banking market that Europe urgently needs to finance the major transformative shifts ahead: green, digital, geostrategic and structural.
In the long run, institutional barriers that undermine financial integration will negatively affect the international competitiveness of the European banking sector. Despite, or perhaps because of, the intricate web of legislative, regulatory and supervisory constraints, the sector may struggle to overcome its longstanding fragmentation and could become vulnerable once again.
Lingering risk: A new doom-loop crisis resulting from incomplete banking integration
Perhaps the most significant, yet often overlooked, consequence of the Banking Union’s incompleteness is the continuous failure of policymakers to sever the toxic link between national banking systems and sovereign finances. Today, most European banks still hold disproportionately large domestic sovereign exposures, indicating that the infamous “home bias” is as entrenched as ever. This is particularly true in southern European countries, where banks remain exposed to their own governments’ debt at levels comparable to those seen during the height of the euro crisis. The danger of fragile banks and weakened sovereigns dragging each other down in a damaging feedback loop remains very much alive, and it could take Europe by surprise if another global crisis hits financial markets again.
As Mr. Veron emphasizes, due to deeply rooted historical legacies, member states remain hesitant to loosen their grip on domestic banking sectors. Contrary to the requirements of the EU’s single market framework, banking nationalism persists throughout the bloc. The fragmentation of the financial system along national lines is perhaps the most striking confirmation that, in fact, there is no true banking union in Europe.
European policymakers’ decision to separate the regulatory treatment of sovereign exposures from the broader Banking Union policy agenda, coupled with their inability to reach a consensus on this politically sensitive issue, has left one of the euro area’s greatest vulnerabilities intact – the very one that nearly led to its collapse in 2012.
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