European Parliament approved the Banking Union reforms

Apr 17, 2014 13:21 IST

European ParliamentThe European Parliament on 15 April 2014 approved the Banking Union reforms. The banking reforms provides for a set of rules to supervise the eurozone banks and deal with any future failures. It also puts an end to the era of taxpayers-funded bailouts of defaulting banks.

The main features of the Banking Union reforms

• To establish a new oversight system known as the Single Supervisory Mechanism (SSM) under the European Central Bank (ECB) this will become operational from November 2014.
• SSM will be complemented by a Single Resolution Mechanism (SRM). SRM will act on the advice of the ECB to stabilise or close down a bank before it can do any wider damage to the economy
• A fund of 55 billion euros (76 billion dollars) will be set up to cover the cost of closures. The fund will be paid by a levy on the banks.
• Customer deposits will be guaranteed up to 100000 euros, with the banks also required to meet this commitment by setting aside enough reserves
• Lenders must comply with stricter rules of conduct and capital levels. The aim is to limit the amount of risk a lender can take on and to ensure that shareholders and creditors shoulder the cost of any rescue, not the taxpayer.

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Analysis
The Banking Union reforms are widely seen as essential for the monetary union of the euro single currency whose very existence came under threat as the debt crisis forced Greece and then Ireland and Portugal to seek massive international bailouts.

However, the International Monetary Fund warned that more work was needed because the procedures appeared too cumbersome to ensure a rapid solution if a bank threatened the financial system.

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