Back in 2012, European leaders emerged from an all-night summit resolved to “break the vicious circle” between national governments and the banks that held their bonds — the so-called doom loop. With the debt crisis raging for a third year and Spain’s banks on the ropes, they put forth a plan for a banking union, focused on the euro currency bloc, that would keep taxpayers off the hook when lenders collapse. The project had three parts: putting the European Central Bank in charge of bank supervision; setting up a single resolution authority to handle failing lenders; and creating a common system of deposit insurance. Seven years later, the first part was well established and the second had come through its first big tests. Work on the third is still mired in political disputes, though signs of potential compromise emerged in late 2019. Nevertheless, European banks are still closely linked to their home countries.
The lack of a common deposit insurance scheme, long cited as a roadblock to cross-border bank consolidation, was put back on the table in late 2019 when German Finance Minister Olaf Scholz signaled a softening of his country’s longstanding opposition. Meanwhile, the Brussels-based Single Resolution Board, responsible for handling euro-area bank failures, has been open for business since 2016. While it has dealt with the collapse of a Spanish bank, rules that can force senior bondholders to take losses have yet to be tested. The agency is setting the level of debt that banks in the European Union must have available to be wiped out or converted into equity if they get into trouble. The biggest banks in the region will eventually need to have about 8% of their liabilities and shareholder equity in such securities. At the same time, the Frankfurt-based ECB is developing a track record as a banking supervisor, after kicking off its oversight in November 2014 with a stress test that failed 25 lenders. There are mounting concerns about the low profitability of European banks — especially due to negative interest rates — and the continued fragmentation of the market along national lines.