EU Banking Union: SSM, SRM, and the Road to EDIS
Introduction
The European Banking Union represents the most significant transfer of sovereign authority over banking supervision and resolution since the introduction of the single currency. Established in response to the sovereign debt crisis (2010–2012), the Banking Union rests on three pillars: the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM), and the proposed European Deposit Insurance Scheme (EDIS). Its rationale is to sever the “doom loop” between sovereigns and domestic banks, harmonise supervision across participating Member States, and ensure that bank failures are resolved without taxpayer-funded bailouts.
The Single Supervisory Mechanism
Regulation (EU) No 1024/2013 (the SSM Regulation) confers on the European Central Bank (ECB) direct supervisory responsibilities over “significant” credit institutions in participating Member States. Significance is determined by total assets (exceeding €30 billion or 20% of GDP), cross-border activity, public financial assistance, or designation as significant by the ECB following a three-year review cycle. Approximately 113 significant institutions, holding nearly 82% of Banking Union banking assets, are directly supervised by the ECB. Less significant institutions remain under national competent authority supervision but within the ECB’s overarching framework of oversight, guidance, and regulatory standards.
The ECB’s supervisory toolkit includes authorisation and withdrawal of licences, assessment of qualifying holdings, ongoing compliance with prudential requirements (Capital Requirements Regulation and Directive — CRR/CRD IV), stress testing, and supervisory review and evaluation process (SREP). The SSM operates within a legal framework that separates monetary policy from supervisory functions: the Supervisory Board — composed of a Chair, Vice-Chair, four ECB representatives, and national supervisory authority representatives — prepares draft decisions adopted by the ECB Governing Council under a non-objection procedure.
The Single Resolution Mechanism
Regulation (EU) No 806/2014 (the SRM Regulation) centralises resolution planning and decision-making for banks within the Banking Union. The Single Resolution Board (SRB) , an independent EU agency, assesses resolvability, sets minimum requirements for own funds and eligible liabilities (MREL), and adopts resolution schemes for failing institutions. Resolution tools under the Bank Recovery and Resolution Directive (BRRD, Directive 2014/59/EU), applied through the SRM, include: (a) sale of business tool; (b) bridge institution tool; (c) asset separation tool; and (d) bail-in tool.
The bail-in tool, codified in Article 27 SRM Regulation and Articles 43–55 BRRD, ensures that shareholders and creditors absorb losses before public funds are deployed. Bail-in applies to all liabilities not expressly excluded (covered deposits, secured liabilities, short-term interbank liabilities, and certain employee claims). The hierarchy of loss absorption requires shareholders first, followed by subordinated creditors, senior creditors, and uninsured depositors. A minimum bail-in of 8% of total liabilities must be exhausted before the Single Resolution Fund (SRF) may be accessed.
The Single Resolution Fund
The SRF, financed by ex ante contributions from Banking Union banks (calculated on the basis of total liabilities less own funds, adjusted for risk profile), reached its target level of approximately €70 billion by the end of 2023. The Fund may be used to guarantee assets or liabilities, provide loans, purchase assets, make contributions to bridge institutions, or compensate creditors who would have fared better under normal insolvency proceedings (the “no creditor worse off” principle). The common backstop — a credit line from the European Stability Mechanism (ESM) to the SRF — was agreed in 2021 but has not yet been ratified; it would provide a fiscal backstop of up to €68 billion where the SRF’s resources prove insufficient.
European Deposit Insurance Scheme
EDIS, proposed by the Commission in 2015 as the Banking Union’s third pillar, remains politically deadlocked. The proposal envisions a three-stage transition: (a) reinsurance (first 3 years), where national Deposit Guarantee Schemes (DGSs) access EDIS financing only after exhausting their own means; (b) coinsurance (4–8 years), where EDIS progressively shares losses; and (c) full insurance (from year 9), providing complete coverage. German opposition, premised on moral hazard concerns and the need for non-performing loan reduction before risk-sharing, has prevented progress. The 2024 Eurogroup statement reaffirmed commitment to EDIS but set no timeline.
Bank Recovery and Resolution Directive
The BRRD, applied through national implementation, requires all EU credit institutions to prepare recovery plans (developed by the institution) and resolution plans (prepared by resolution authorities). Resolution triggers under Article 32 BRRD include: (a) the institution is failing or likely to fail; (b) no private sector alternative would prevent failure within a reasonable timeframe; (c) resolution is in the public interest; and (d) winding up under normal insolvency would not achieve resolution objectives. The moratorium power allows resolution authorities to suspend payment and delivery obligations for up to two business days to facilitate orderly resolution.
Minimum Requirement for Own Funds and Eligible Liabilities (MREL), set by the SRB on a bank-by-bank basis, determines the quantum of liabilities available for bail-in. MREL varies according to systemic importance, business model, and resolution strategy (multiple-point-of-entry versus single-point-of-entry). The calibration requires loss-absorbing capacity of at least 8% of total liabilities plus own funds for internal MREL issued to the resolution entity.
Case Law and Constitutional Challenges
The Banking Union’s legal architecture survived critical constitutional challenges. In Gauweiler (2015) and Weiss (2018), the CJEU upheld the ECB’s Outright Monetary Transactions and Public Sector Purchase Programmes under the monetary policy mandate, while Gauweiler established strict proportionality review. The German Federal Constitutional Court’s PSPP judgment (2020), which found an ultra vires act, was subsequently resolved through the ECB’s proportionality assessment. In Ledra Advertising (2016), the CJEU held that the European Stability Mechanism’s involvement in the Cypriot bail-in fell outside EU law for Charter of Fundamental Rights purposes, creating a gap in fundamental rights protection.