Banking union is one offour building blocks for creating genuine economic and monetary union identified by European Council President, Herman van Rompuy. Such a union would aim to break the negative feedback loop between sovereign debt and the health of the banking system.
As a first step, the European Commission proposed in September 2012 to confer supervisory authority for all eurozone banks on the European Central Bank. A second proposal includes a set of modifications to enable the European Banking Authority to continue its mission under the new supervision framework.
Political leaders and economists are now examining the proposals’ feasibility and operational challenges. If a single supervisory mechanism is to be established, questions need to be answered on which banks will be covered, its geographical reach, sharing of responsibilities amongst different supervisors and the lack of common deposit guarantee and resolution mechanisms. Discussions are also ongoing on possible recapitalisations of troubled banks through the European Stability Mechanism and the exact timeline to be followed for all these measures.