One of the outgoing European Parliament's final and most significant acts before next month's elections has been to legislate for a European banking union. This ensures taxpayers in member states will no longer have to bail out their failed national banks. No country has paid a greater price than Ireland for the cost of bank rescues, a huge burden borne by taxpayers and amounting to some €64 billion. If the EU legislation on banking union had been in place sooner – before the onset of the 2008 financial crisis – the sharing of the cost of the bank bailouts would have been more equitable. Bondholders would have suffered large losses and the cost to taxpayers reduced. However, bondholders then could not be burned. Now they can. And taxpayers can breathe more easily as in future bank creditors are exposed to potential losses where banks fail.
The Bank Recovery and Resolution Directive (BRRD) also provides for a deposit guarantee scheme, which protects deposits under €100,000. The European Parliament, European Commission and European Council, have taken four years to agree this legislation. The BRRD will be implemented in phases starting next year, and come into full effect in 2025. At that stage the proposed single resolution fund, financed by the banks of participating states, should amount to €55 billion. But will the fund be big enough to withstand a future financial crisis? That remains one of the concerns, given the scale and duration of the last crisis – where an estimated €600 billion was needed in 2008-2009 to bailout European banks in difficulty.
The new legislation reflects a concern to learn from experience, and to adapt. This means major changes in roles and responsibilities for banks, national governments, bondholders and taxpayers. Governments will be less able to rescue banks in difficulty, as more power passes to Europe. From November the European Central Bank will take over supervision of the EU's largest banks. In the new dispensation, bondholders, who were bailed out last time by taxpayers, will in future be bailed in. So when a bank fails, bondholders will be required to take losses. And banks will face increased oversight at national and EU level. However, taxpayers can take most reassurance from the changes, as their exposure to bank failure and liability for bank rescue has been minimised.
These bold steps towards a banking union are taken to ensure the single currency functions better. From a position where, at the height of the global financial turmoil six years ago, the future of the euro was in question, the latest reforms mark a turning point. Greater financial stability has been established in the euro area and firm foundations finally laid for the development of a full banking union.