Towards European Banking Union: Institutional Framework and Open Issues

Fiscal consolidation programs adopted by several advanced economies seem tohave gone «too far too fast» jeopardizing the feasibility of the same austerity plans.In the Eurozone, problems induced by fiscal adjustment have been magnified by theperverse links between sovereign and banking crisis. Increasing sovereign spreadshave dramatically affected the monetary policy transmission mechanism, altering thecost and availability of credit between the PIGS and core Europe. In this scenario,the institution of a single supervisory mechanism (within the ECB) for banks in theEurozone has been recently proposed. This proposal is the first crucial step in creatinga European Banking Union and strengthening the working of Economic andMonetary Union (EMU).There are several good reasons justifying this sovereignty-transfer of supervisorytasks related to financial stability. At the same time there are a number of major impediments- both of economic and political nature.The paper is a short survey of the main aspects related to the creation of a EuropeanBanking Union, with a focus on the role played by SIFIs - financial institutionsthat are too interconnected to fail. The ultimate picture is not very encouraging.Even assuming that sovereignty-transfer of supervisory tasks will take place bythe end of 2013, three big issues are still unsettled: a) which institution is going tobe the manager of banking crisis? b) when a deposit insurance mechanism inside theEurozone will be effective? c) which type of additional regulatory framework will bedefined and implemented with reference to SIFIs?