Banking on greater European integration – six years on

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Banking supervision, or the control exerted over banks to ensure that they behave prudently and keep sufficient levels of capital and liquidity to withstand macroeconomic or financial shocks, is the first pillar of the banking union. It was launched by former European Council President Herman van Rompuy in 2012 in the wake of the euro area debt crisis. Today, on 4 November 2020, the supervisory pillar of the European Central Bank (ECB) turns six years old. Has European banking supervision reached the age of maturity?

Until recently, the banking union included only the 19 euro area Member States, whose euro area membership made their participation mandatory. The doors remained theoretically open for the ‘outs’, and in July of this year Bulgaria and Croatia joined the banking union through supervisory cooperation. While a significant milestone, the latter achievement has been overshadowed by the challenges of the pandemic, and has received little public attention.

Banking supervision in the euro area

The magnitude of the euro area banking sector is vast: the banks headquartered in the euro area represented nearly 73% of the overall banking sector in the European Union (EU) in total assets at the end of 2019. This share will increase with the broadening of the geographical scope of the banking union and euro area (and with the end of the Brexit transition period and banks’ relocation). In terms of banking supervision, this means a shift in supervision from a national to European, composite reality. In the banking union, supervision of banks is set in a single mechanism combining the ECB and the national competent authorities in the euro area Member States (called Single Supervisory Mechanism or, the SSM).

Becoming ‘in’? Bulgaria and Croatia join the party

Croatia and Bulgaria both joined the SSM by requesting the establishment of close cooperation between the ECB and their national competent authority (NCA).

Bulgaria was the first non-euro area Member State to request the establishment of such cooperation with the ECB (June 2018), followed by Croatia (July 2019). Since July 2020, close cooperation has been formally established between the ECB and the respective central banks, that are Българска народна банка (Bulgarian National Bank, Decision 2020/1015) and Hrvatska narodna banka (Croatian National Bank, Decision 2020/31). In operational terms, banking supervision under the SSM started on 1 October 2020, after a comprehensive assessment of banks falling under ECB’s direct supervision in both Croatia and Bulgaria.

The Czech Republic, Hungary, Poland, Romania, Sweden, and Denmark (which has an opt-out) still remain outside of the mechanism and the euro area.

Banking union and euro area memberships: twins or siblings?

Bulgaria and Croatia might set a precedent for simultaneous close cooperation and participation in the Exchange Rate Mechanism (ERM) II, which are the practical steps for joining the banking union and ultimately adopting the euro. The Eurogroup political leaders actually declared their intention to support this simultaneous membership for future Member States (e.g. Eurogroup Statement 453/18). In fact, the same day of the adoption of the close supervisory cooperation decisions, the respective currencies (Bulgarian lev and Croatian kuna) entered in the ERM II, which has formally paved the way to the euro area membership (expected by 2023, see Fabio Panetta’s speech). This would ensure full rights of participation of Bulgarian and Croatian national authorities in the decision-making and governance of the SSM and the ECB. With their present status, they have voting rights in the Supervisory Board of the SSM (Banking Supervision side), but will have no say in the ECB’s Governing Council until they are formally members of the euro area.

So, who watches your bank?

At the practical level, the national authorities of the 21 participating Member States are in the ‘mechanism’ set for banks’ supervision, together with the ECB. The supervisors ‘in charge’ differ depending on a set of criteria about the size of the bank, its importance for the economy and activities carried across borders, among other criteria that are defined in EU secondary legislation. The supervisory responsibilities are allocated between the ECB and the national supervisors. In very simple terms, the division of responsibilities follows a distinction between significant and less significant banks. The ECB supervises the significant ones directly (today 114) whereas national authorities supervise the latter (and remain under the indirect supervision of the ECB, see the list of all entities under the SSM supervision). The European, composite reality of the mechanism also makes national and ECB supervisors working together in joint settings or teams.

To take two fictitious examples, let’s say that Boris has a bank account in Zagrebačka banka, the largest bank in Croatia. This bank is now under ECB’s supervision. Kristina has a bank account in Texim Bank, which is a less significant bank in Bulgaria, and remains under the supervision of the Bulgarian national bank with oversight from the ECB. It should be noted that, for all banks in the euro area, whatever their size, economic importance or level of cross-border activities, the ECB retains the significant powers of granting or withdrawing licenses, and authorizing the acquisitions of qualifying holdings (what is sometimes crudely called the powers of ‘birth, marriage and death’).

An integrated banking sector

The European, composite reality of supervision shows what the banking union could ultimately help achieve once it is mature: an integrated, European banking sector for which the same rules and same levels of supervisory control apply in similar situations, across the EU as a whole. Reaching maturity and further integration also calls for completing the banking union, as a ‘matter of priority’.


Christy Ann Petit defended her Ph.D. thesis An integrated system for banking supervision in the Banking Union in the Department of Law at the EUI in February 2020. She works as Research Associate at the Florence School of Banking and Finance of the Robert Schuman Centre. Her chapter  ‘The SSM and the ECB decision-making governance’  was published in The European Banking Union and the Role of Law.