Eurobank Regulator

Legal Attacks on the Euro Zone's Proposed Banking Union Could Further Undermine Confidence in the System

Bundesbank President Jens Weidmann at Bundesbank Frankfurt HQ in July 2014. Source DPA
Bundesbank President Jens Weidmann at Bundesbank headquarters in Frankfurt in July 2014.
  • Why it matters

    Why it matters

    Europe’s proposed banking union aims to forestall future crises, but legal challenges to the new oversight regime, if successful, could undermine confidence in the sector.

  • Facts

    Facts

    • The European Central Bank plans to publish the results of its “stress test” of banks in the euro zone in October.
    • Troubled banks in the Eurozone could draw on an emergency fund, but only after creditors and shareholders absorb at least 8 percent of costs.
    • If further funds are needed, individual Eurozone countries would have to contribute to save their own banks.
  • Audio

    Audio

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The European Banking Union is celebrated by advocates as a revolutionary way to create a more stable institutional architecture for the euro zone. Opponents say the planis indirectly creating a Europe-wide liability for all eurozone taxpayers and customers of indebted banks.

Euro skeptics such as Markus Ferber, the chairman of the Christian Social Union’s fraction in the European Parliament, wants to take the issue to the Federal Constitutional Court of Germany. In reality, the critics are exaggerating.

Consider the key elements and the facts of the banking union.

In the future, the European Central Bank will oversee banks in the euro zone. Before that scrutiny begins, the ECB is screening the balance sheets of the largest banks so that hidden losses can be revealed. All banks will be required to maintain more equity. The results of these “stress tests” will be announced in October.

If the banks still have financial problems, they will be restructured or liquidated according to a uniform, regulated process spelled out in the banking union’s agreement. In the case of losses, bank equity owners and creditors will be liable first and foremost. Small investors will be protected through a deposit protection fund.

 

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