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Eur Bus Org Law Rev (2017) 18:535–565
DOI 10.1007/s40804-017-0074-2
The Legal History of the Banking Union
Pedro Gustavo Teixeira1,2
Published online: 14 October 2017
Ó T.M.C. Asser Press 2017
Abstract This article provides a brief legal history of the Banking Union since the
first steps towards a single financial market in the mid-1970s. It identifies four
phases of legal and institutional evolution before the Banking Union. While
reflecting the spirit of the time in the approach to market integration, each phase is
defined by the equilibrium reached between the expansion of European competences and the safeguarding of national sovereignty. The transition from an equilibrium to another was made by introducing legal and institutional innovations to
deepen integration. Such innovations were often at the boundaries of what could be
achieved under the Treaty. The Banking Union, which comprises thus far the Single
Supervisory Mechanism and the Single Resolution Mechanism, follows the same
pattern. Its design is the outcome, on the one hand, of the legal possibilities offered
by the Treaty and, on the other, of the tension between European competences and
national sovereignty. As concluded at the end, it encapsulates many of the trends in
European integration since the financial crisis erupted in 2007.
Keywords European Banking Union Single Supervisory Mechanism Single
Resolution Mechanism Financial integration Financial crisis Financial
stability European legal history
The views expressed are those of the author and do not necessarily represent those of his institution.
Comments on an earlier draft from an anonymous reviewer are gratefully acknowledged as well as from
participants at the workshop organised by the European University Institute on 11 October 2016 on ‘The
European Banking Union and Its Instruments—Experience from the First Years of an Interplay with
National Banking Supervision and Resolution’.
& Pedro Gustavo Teixeira
European Central Bank, Frankfurt am Main, Germany
Institute for Law and Finance, Goethe-Universität, Frankfurt am Main, Germany
P. G. Teixeira
1 Introduction
The creation of the Banking Union is a response to the combination of the financial
and public debt crises, which affected the EU and the euro area since 2007.1 At the
same time, it represents the latest stage of the evolution of the single financial
market. Its origins and implications cannot be fully understood without being placed
in this context.
Although it is now at the forefront of European integration, a single financial
market was not part of the foundational objectives of the European Economic
Community. The Treaty of Rome of 1957 did not envisage a financial market as one
of the components of the common market.2 The movement of capital was not a
basic freedom until the Single European Act entered into force some 30 years later.
The underlying reason for originally excluding the financial sector from the
European project was the same that has been at the heart of the evolution of the
single financial market until the present day: the fact that finance and its regulation
stand at the core of national sovereignty. Finance supports the conduct of economic
and industrial policy, monetary policy, budgetary policy, including the financing of
the state through public debt, and taxation. Relinquishing sovereignty in these areas
constrains the core of national political sovereignty.3
Since the Treaty of Rome, the evolution of the single financial market has
mirrored to a large extent the key legal and institutional steps in European
integration.4 With the Banking Union, there have been five evolutionary phases thus
far. Each phase represents the equilibrium reached between, on the one hand,
expanding European competences to increase integration and, on the other hand,
The Banking Union follows a now long line of successive institutional and legal responses to the crisis.
For an overview of the sequence of responses and its potential European constitutional impact, see Chiti
et al. (2012). For a related critical analysis of the implications of the responses on the legal ordering and
political legitimacy in the EU, see Joerges (2015). See also the wider policy analysis relating to several
areas of European integration by Laffan (2016).
The original version of Art. 67 of the Treaty of Rome of 1957 provided that the liberalisation of capital
movements was to take place in the transitional period of 12 years only ‘to the extent necessary to ensure
the proper functioning of the common market’.
This tension was already debated as early as in the 1956 Spaak Report, which provided the basis for the
discussions at the Intergovernmental Conference on the Common Market and Euratom that prepared the
Treaty of Rome. This report argued for the economic benefits stemming from the freedom of movement
of capital. It pointed to the nationalism and protectionism underpinning capital controls among the
founding Member States and to the progressive irrelevance of such controls in an integrated economic
area. At the same time, it acknowledged the need to avoid that unrestrained capital flows would lead to
imbalances among Member States, affect their ability to implement monetary policy or to tax capital
income, and lead to insufficient or more costly financing of less-developed regions. The way forward
would be to follow a flexible process, without a precise calendar or milestones, for the progressive
liberalisation of capital movements, which would adapt itself to development of the common market. The
Spaak Report concludes its chapter on capital movements by stating that full economic integration will
not be achieved until Member States renounce to autonomous budgetary, financial and social policies, and
also until they create a single currency. In the meantime, the dynamics of economic integration would
have to be based on a sufficient degree of convergence of such policies. See Comité Intergouvernemental
crée par la Conférence de Messine, Rapport des Chefs de Délégation aux Ministres des Affaires
Étrangères, Brussels 21 April 1956, especially at pp. 92–96.
See Teixeira (2010), pp. 209–251; and also the follow-up analysis in Teixeira (2011).
The Legal History of the Banking Union
preserving national sovereignty so as to constrain integration at the level deemed
politically acceptable to Member States. Along the way, the transition between
phases was made on the basis of legal and institutional innovations to deepen
integration at the boundaries of what could be achieved in each period under the
Likewise, the design of the Banking Union is based on several legal and
institutional innovations, which led to a new equilibrium between European
competences and national sovereignty. Accordingly, this contribution analyses the
rationale of the decision of the Euro Area Summit of June 2012 to establish the
Single Supervisory Mechanism (SSM), the first pillar of the Banking Union. This
includes the choice to use Article 127.6 Treaty on the Functioning of the European
Union (TFEU) as the legal basis of the SSM, which is key for understanding the
‘genetic code’ of the Banking Union. Its unique legal and institutional features
represent the combination of the frameworks of the Monetary Union and the single
financial market. The analysis is further elaborated with regard to the use of Article
114 TFEU as the legal basis for the Single Resolution Mechanism. The outcome of
this legal construction of the Banking Union is somewhat paradoxical: the single
financial market is both more deeply integrated and more fragmented. The
conclusion provides an assessment of the extent to which the Banking Union
represents both continuity and break with the single financial market, also in the
context of the evolution of European integration as a whole.
2 Integration Through Harmonisation (1973–1984)
The first phase of the evolution of the single financial market corresponds to the
period between the mid-1970s, when the first generation of Community law
instruments in the field of finance were adopted, and the mid-1980s, before the
Single European Act. This period was marked economically by slowdown in
productivity, high inflation, unemployment, and economic recession. The Bretton
Woods system of pegged exchange rates was abolished in 1971. This raised the need
in Europe for the convergence of exchange rates to support the flows of trade and
economic integration, culminating with the European Monetary System (EMS) in
1979.6 In institutional and legal terms, it was the period where the Community
started to expand its competences. At the historic Paris Summit of October 1972, the
Many of these innovations were proposed by successive ‘Comité des Sages’, which were convened by
the European Commission to propose approaches to promote integration. The European Commission
commissioned policy reports on the European financial market almost every 10 years. On the basis of
their respective chairperson, the reports included the Segré Report: The Development of a European
Capital Market, Report of a Group of experts appointed by the EEC Commission, Brussels, November
1966; the Schmidt Report: The Advantages and disadvantages of an integrated market compared with a
fragmented market, Commission of the European Communities, Brussels, 1977; the Cecchini Report:
Europe 1992, The overall challenge SEC(88) 524 final, Brussels, April 1988; the Lamfalussy Report:
Final Report of the Committee of Wise Men on the Regulation of European Securities Markets, Brussels,
February 2001; and the De Larosière Report: The High-Level Group on Financial Supervision in EU,
Brussels, February 2009.
See Eichengreen (2007), especially at pp. 246–251; James (2012), pp. 96 et seq.
P. G. Teixeira
Heads of State or Government declared their intention to expand the range of
policies pursued by the Community into areas not explicitly covered by the Treaty,
including economic and monetary issues, if required also through the use of the
exceptional clause of Article 235 of the Treaty of Rome (now Article 352 TFEU).7
The Court also contributed to this expansion of competences with the judgements in
Dassonville in 1974 and Cassis de Dijon in 1979, which provided the basis for
removing restrictive national measures even in the absence of harmonisation of
national laws in a particular area.8
This was the context in which the first measures to build a single financial market
were introduced in the 1970s.9 The legal approach was to start a process of full
harmonisation of national laws as the means to address the distortions created by
regulatory differences across Member States, and also to prevent discrimination in
the freedom of establishment on the grounds of nationality.10 One of the legal
innovations was the introduction of the concept of the principle of home-country
control, according to which a national authority is responsible for the regulation and
supervision of a bank licensed in its respective Member State and operating across
the common market, including its foreign branches. This principle stemmed from
the Basel Concordat of 1975.11
In reality, however, there was very little progress, if any, in financial integration
during this period. Legally, the challenge of ever achieving sufficient uniformity of
national laws for realising a single financial market was unsurmountable at the time.
Member States fully safeguarded the application of national laws as a matter of
public interest, which prevented any expression of home-country control. Moreover,
in the spirit of the Luxembourg compromise of 1966, the Member States maintained
unanimity voting on matters of national interest such as finance. The political and
economic context—including the general scepticism of European integration, which
became known as ‘Eurosclerosis’—was more conducive to protectionism of the
national financial industry, including through capital controls, than to market
liberalisation. This corresponded to the equilibrium reached in this phase between
European competences and national sovereignty. The expansion of such
Statement from the Paris Summit (19–21 October 1972), Bulletin of the European Communities,
October 1972, No. 10. Luxembourg, Office for official publications of the European Communities,
pp. 14–26. On the historical and political background of the summit, see Van Middelaar (2013),
pp. 113–114.
Case C-8/74 Procureur du Roi v. Dassonville [1974] ECR 837; Case 120/78 Rewe Zentrale v.
Bundesmonopolverwaltung für Branntwein [1979] ECR 649.
The most significant Community measures in this period were the Council Directive 73/183/EEC of 28
June 1973 on the abolition of restrictions on freedom of establishment and freedom to provide services in
respect of self-employed activities of banks and other financial institutions [1973] OJ L 194, pp. 1–10;
and the First Banking Directive, Council Directive 77/780 of 12 December 1977 on the co-ordination of
laws, regulations and administrative provisions relating to the taking up and pursuit of the business of
credit institutions [1977] OJ L 322, p. 30.
This was the approach advocated early on by the Spaak Report, pp. 60–66, and also by the Segré
Report in 1966. On the background to the Segré Report, see Mourlon-Druol (2016), pp. 913–927. For an
analysis of the meaning of harmonisation of national laws in this period, see Stein (1964), pp. 1–40,
especially at p. 7.
Basel Committee on Banking Supervision, Report on the supervision of banks’ foreign establishments,
September 1975, available at (accessed 28 April 2017).
The Legal History of the Banking Union
competences to the financial sector, including the introduction of legal innovations
such as home-country control, was countered by the national interests in
safeguarding domestic financial markets.12
3 Integration Through Competition (1985–1998)
The second phase corresponds largely to the pursuance of the single market
programme, which was triggered by the 1985 White Paper of the Commission.13 By
the mid-1980s, while still recovering from the economic recession, the Member
States were increasingly interdependent as a result of the growing trade linkages,
capital flows, and the obligations stemming from the EMS. This provided the
background for the convergence of political and economic preferences among
Member States towards market liberalisation and deregulation. The Community was
seen as the platform to deregulate protected sectors of the economy. There were,
however, different political agendas at the domestic level. In some cases, notably
France, the objective was to circumvent domestic resistance to liberalisation. In
other cases, notably the UK, the aim was to expand the scope of domestic reforms,
particularly in financial services, and benefit from a larger market. The convergence
of these disparate domestic political interests in using the Community led to the
single market programme, which equated economic growth to further market
integration. The Single European Act introduced the legal instruments needed to
complete the single market by the end of 1992.14
The vision of the 1985 White Paper was that market integration would develop
out of the dynamics of competitive forces in free and efficient markets. The priority
was dismantling the barriers to trade and services across the Community. This
would operate through the removal of national regulatory requirements, which were
deemed both excessive and largely designed to protect domestic business. The
approach to financial integration turned from attempting the harmonisation of
national laws to unleashing the ‘competition among rules’ between Member
This was also the official diagnosis, as the Commission stated in 1983 that ‘financial markets are
probably even less integrated now than in the 1960s, since capital movements within the Community are
less free and the differences between the Member are more marked’; European Commission, Financial
Integration, Communication from the Commission to the Council, COM(83) 207 final, 20 April 1983.
European Commission, Completing the Internal Market, White Paper to the European Council of
28/29 June 1985 in Milan, COM(85) 310 final, 14 June 1985.
For an account of the national economic preferences underpinning the Single European Act, see
Moravcsik (1998), pp. 314 et seq. See similar interpretations by Van Middelaar (2007), especially at
pp. 339–340.
The expression ‘competition among rules’ was used in the 1987 Padoa-Schioppa Report, Efficiency,
Stability and Equity, A Strategy for the Evolution of the Economic System of the European Community,
April 1987, available at
19870410en149efficiencstabil_a.pdf (accessed 28 April 2017). For an explanation of the concept of
regulatory competition applied in the field of finance, see also Padoa-Schioppa (2004), especially at
pp. 40 et seq.
P. G. Teixeira
In the context of the single financial market, this was translated into three legal
principles: the mutual recognition of national laws, the minimum harmonisation of
national laws, and freedom of movement of capital.16 The application of these
principles—which essentially represented an extension of the Cassis de Dijon
doctrine—provided a single passport to financial institutions for the provision of
services throughout the Community.17 As these institutions would be free to select
the Member State of origin, Member States would be required to adapt their laws
and regulations in order to both attract and retain them in their jurisdiction. The
minimum harmonisation of national laws would prevent a ‘race to the bottom’ by
Member States on regulatory standards.18
This legal method did not deliver the level of market integration that was
expected. The national financial industry remained highly regulated and protected.
The minimum harmonisation of national laws did not prove sufficient for the
functioning of the mutual recognition of national laws. The ‘general good
exception’ that could be invoked by Member States to restrict market access to
safeguard public interest, such as consumer protection, represented a powerful
obstacle. This was both, explicitly, through the application of the laws of the hostcountry and, implicitly, through the enforcement practices of national authorities.19
As a result, the cross-border provision of financial services did not expand out of the
single passport. Instead, the preferred mode of market entry for financial services
remained the acquisitions of local firms, also due to factors such as proximity to
customers, taxation, labour laws, and protectionist practices.20
This period of ‘integration through competition’ led to a new equilibrium
between European competences and national sovereignty. The legal innovation of
the single passport for financial services provided the basis for expanding the single
financial market without constraining national sovereignty through the full
The freedom of movement of capital was introduced by the Single European Act. The full
liberalisation of capital movements, both between Member States and with third countries, was however
only achieved with Council Directive 88/361/EEC of 24 June 1988 for the implementation of Art. 67 of
the Treaty [1988] OJ L 178, pp. 5–18.
The single passport concept took its main expression in the banking field, where a complete
liberalisation of the sector was envisaged. The Second Banking Directive was the main instrument in this
context: Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws,
regulations and administrative provisions relating to the taking up and pursuit of the business of credit
institutions and amending Directive 77/780/EEC [1989] OJ L 386, pp. 1–13.
On the dynamics of regulatory competition in the single market, see Majone (2009), especially at
pp. 151–155.
The so-called ‘general good principle’ has been developed in the case law of the Court. For its
application in the context of the Second Banking Directive, see European Commission, Commission
Interpretative Communication: Freedom to Provide Services and the Interest of the General Good in the
Second Banking Directive, SEC(97) 1193 final, Brussels, 20 June 1997, especially at pp. 18–28.
The completion of the single financial market was not achieved in practice by 1992 due to a number of
shortcomings, as diagnosed by the Sutherland Report. These included failures by Member States in
transposing Community legislation into national law, as well as failures in the implementation by national
authorities, for instance due to different regulatory practices or different interpretations. In addition, the
market participants and the consumers affected by such failures did not have access to rapid and effective
means of redress. See The Internal Market After 1992: Meeting the challenge (Sutherland Report), Report
to the EEC Commission by the High-Level Group on the Operation of the Internal Market presided by
Peter Sutherland, of 28 October 1992, SEC(92) 2044.
The Legal History of the Banking Union
harmonisation of national laws, as in the last period. The exercise of national
competences remained, nonetheless, an obstacle to potential integration, notably in
the areas safeguarded by ‘the general good exception’.
The legal and institutional approach of this period had, however, deep
implications. It was particularly successful in placing market integration as the
core objective of Community policies, regardless of the level of political and
regulatory integration among Member States. From then on, the ever deepening of
market integration as the basis for economic growth became a political, economic
and legal objective by itself. In this period, the logic of integration became the only
necessary and sufficient justification for European policies and law.21
In financial services, this logic was pursued through the full freedom of capital
movements and the single passport. These policy and legal concepts introduced the
premise that finance could expand unlimitedly throughout the single market,
independently of the Member State of origin. This provided the basis for the most
liberal framework for cross-border finance at the time, which then became
widespread globally in the course of the 1990s. The rules of global finance first
started in the single European financial market.22
4 Integration Through Governance (1999–2007)
The third phase in the legal evolution of the single financial market starts with the
transfer of the conduct of monetary policy to the ECB and the introduction of the
euro in January 1999. It is characterised by two developments to overcome the
limitations of the previous phase of integration: the expansion of the law of the
single financial market beyond minimum harmonisation on the basis of the 1999
Financial Services Action Plan (FSAP); and the introduction in 2001 of the
Lamfalussy framework of governance.
The FSAP was justified by the need to reap the benefits of the single currency for
the European financial market, which required the elimination of legal and capital
fragmentation. It comprised more than forty initiatives for harmonizing, by 2005, a
wide spectrum of the legislative framework for the provision of financial services.23
It marked the shift from the ‘negative integration’ of the previous period, focused on
dismantling barriers to market entry, to ‘positive integration’, based on the
European re-regulation of financial services.24
At the same time, the expansion of European financial services law was
challenged by the uneven patchwork of national laws, regulations, and supervisory
practices. The question was how to ensure that legislative proposals would be
For a critique of the concept of European law dominated by the ‘ever closer’ integration objective, see
Von Bogdandy (2016), pp. 519–538.
As argued by Abdelal (2007), especially at pp. 218 et seq.
Commission Communication, Financial services: Implementing the framework for financial markets:
Action Plan, COM(1999) 232, 11 May 1999.
On the centralisation of regulation at European level following the FSAP, see Wymeersch (2005),
pp. 987–1010, at pp. 990–994.
P. G. Teixeira
adopted on time, implemented into national laws consistently, and enforced also
consistently by national supervisors across the single financial market. The answer
provided by the Lamfalussy Report on a European financial market was to introduce
a multi-level framework of governance.25 It comprised essentially two elements.
First, the expansion of the use of comitology procedures, which would enable more
flexible, swift and detailed enactment of Community legislation. Second, the
establishment of several technical committees of national supervisors, which were
mandated to provide technical advice to the Commission and to promote the
convergence of supervisory practices.26
The innovation was setting-up a multi-level framework of governance, which
combined the Community method with intergovernmental comitology procedures
and with networks of national authorities in the adoption and enforcement of
Community law. Its appeal was to enable the development of a regulatory system,
without requiring any Treaty change, and without imposing mandatory obligations
on either the Community institutions or national authorities. This was very much in
line with the strategy of the time to promote ‘new forms of governance’ for pursuing
European policies.27
Financial integration did increase in the decade following the introduction of the
euro, including financial markets, pan-European banking groups and conglomerates,
and market infrastructures. At the same time, integration led to deeper systemic
interlinkages which increased the likelihood that a financial crisis would affect
several Member States or the single financial market as a whole. The governance
framework was, however, based on the principle that national authorities remained
exclusively responsible for the prevention and management of financial crises. This
was justified by the fact that, while the benefits of financial integration would be
shared by all, the potential costs of a crisis involving public funds could not be
shared. This would otherwise impinge on national fiscal sovereignty.
Once again, this period was characterised by a new equilibrium between
European competences and national sovereignty in order to overcome the previous
shortcomings in integration. The innovation of multi-level governance aimed at
realising the balancing act of expanding the European competences while at the
same time retaining national competences. This would be achieved by
Final Report of the Committee of Wise Men on the Regulation of European Securities Markets,
chaired by Alexandre Lamfalussy, available at
lamfalussy/wisemen/final-report-wise-men_en.pdf (accessed 28 April 2017).
The new supervisory or ‘Level 3’ committees included the Committee of European Securities
Regulators (CESR), based in Paris and established in 2001, and later, in 2004, the Committee of European
Banking Supervisors (CEBS), based in London, and the Committee of European Insurance and
Occupational Pensions Supervisors (CEIOPS), based in Frankfurt. The committees were established by
Commission Decisions, namely Commission Decisions 2001/527/EC, 2004/5/EC, and 2004/6/EC.
‘New governance’ was one of key strategic objectives in the programme of the Prodi Commission,
which started its mandate in 1999. The approach was set out in European Commission, European
Governance: a White Paper, COM(2001) 428 final, Brussels, 25 July 2001; and on the follow-up Report
from the Commission on European Governance, Office for Official Publications of the European
Communities, 2003. It was extensively dealt with in academic doctrine. For an overview, see Joerges,
Meny and Weiler (2001); and also the Special Issue of the European Law Journal on Law and the New
Approaches to Governance in Europe, vol. 8, no. 1, 2002.
The Legal History of the Banking Union
institutionalising the cooperation among national authorities in comitology procedures and in formal networks. The European policies and rules would emerge out of
the synthesis of national competences. The preservation of national sovereignty
constrained however such cooperation, which did not extend to the financial crisis
This period ended thus with a more developed single financial market, but subject
to a peculiar regime: a single monetary jurisdiction, a single financial market,
combined with multiple national supervisory jurisdictions and without European
arrangements for preventing or managing a financial crisis.28
5 (Dis-)Integration Through Crisis (2008–2012)
The financial crisis, which unfolded in Europe in the summer of 2007 and reached
its peak after the fall of Lehman Brothers in October 2008, undermined the
fundamental assumptions of the single financial market and led to a retrenchment in
financial integration. The responses to the crisis consisted largely of unilateral
actions by Member States, which in a domino effect sought to protect their
respective financial systems from spillovers. The consequence of these unilateral
actions, such as bank rescues and guarantees, was that the soundness of financial
institutions became dependent on the budgetary capacity of the Member State
backing them. In turn, Member States internalised the large liabilities in their
respective financial systems, which affected the soundness of public finances. This
laid the seed for the ensuing public debt crisis. The implication was that the
paradigm of market integration based on the provision of financial services
independently of the state of origin was no longer tenable. It led to the effective
renationalisation of the single financial market.29
This was the background for reforming the European architecture for financial
regulation and supervision. The impetus came from the recommendations of another
‘Comité des Sages’: the 2009 De Larosière Report. The reform consisted of the
following three legal and institutional changes.30
First, the supervisory committees were replaced by European agencies with
wide-ranging powers, from rule-making in the form of standards, to the enforcement
of European law and crisis management.31 The main innovation was to enable these
agencies—the European Supervisory Authorities (ESAs)—to take legally binding
decisions in certain cases with regard to national supervisors and financial
Padoa-Schioppa (1999), pp. 295–308, especially at pp. 303 et seq.
This also corresponded to the materialisation of the so-called ‘financial trilemma’, which implies that
it is not possible to pursue European financial integration and European financial stability on the basis of
national competences. This is a concept coined and developed by Dirk Schoenmaker. See, in particular,
Schoenmaker (2013), especially at pp. 1–17.
For a detailed analysis of the legal reforms in European law after the financial crisis, see Moloney
(2010), pp. 1317–1383, at pp. 1335–1355; and also Ferran (2012).
See, respectively, Regulations 1093/2010 (establishing a European Banking Authority), 1094/2010
(estabilishing a European Insurance and Occupational Pensions Authority) and 1095/2010 (establishing a
European Securities and Markets Authority) [2010] OJ L 331.
P. G. Teixeira
institutions. This stood at the borderline of the Meroni doctrine on the delegation of
powers to European agencies.32 Most importantly, however, was the restraint
imposed by Member States: a ‘fiscal safeguard clause’ according to which the ESAs
could not take such directly applicable decisions when they may give rise to a fiscal
burden, for instance, by imposing a certain action in a financial crisis that may lead
to the use of taxpayers’ funds. This safeguard clause signaled the limits set to the
exercise of European competences that could have a bearing on national fiscal
The second institutional change was the establishment of the European Systemic
Risk Board (ESRB) with the objective to safeguard the stability of the financial
system through macro-prudential oversight.34 The crisis made evident that the
development of the single financial market had been solely focused on market
integration, without taking account of the European arrangements required to
prevent and manage systemic risks. The creation of the ESRB marked a shift from
the pursuance of narrow integration objectives to the introduction of new European
competences, which could instead restrain market integration to safeguard financial
stability. This also tested the boundaries of the single market framework. It gave rise
to the question of whether the legal basis for building-up the single financial
market—the harmonisation clause of Article 114 TFEU (ex-Article 95 EC)—could
enable the creation of a body responsible for a public policy not directly conducive
to integration. This also justified the fact that the powers of the ESRB could not go
beyond the adoption of non-binding warnings and recommendations.35
The third change operated since the crisis corresponded to the replacement of the
single passport framework by the concept of a ‘single rulebook’. It was a concept
first advocated by Tommaso Padoa-Schioppa in the early 2000s and later by the De
Larosière Report. It aimed at realising integration by subjecting the single financial
market directly to a single set of rules. European law would be the source of such
rules, which would be as much as possible directly applicable. This would replace
On the Meroni doctrine applied to European agencies, see Chiti (2009), pp. 1395–1442.
This applies in particular to decisions in emergency situations and for settling disagreements among
national supervisors. Where a Member State considers that a decision by an ESA impinges on its fiscal
responsibility, it may notify that the national supervisor does not intend to implement the decision,
together with a justification. In case of continuing disagreement, the Council may be involved. See Art. 38
of all the ESA Regulations. For a detailed analysis of the powers of the new European Supervisory
Authorities, see Enria and Teixeira (2011), pp. 421–468.
Regulation (EU) No. 1092/2010 of the European Parliament and of the Council of 24 November 2010
on European Union macro-prudential oversight of the financial system and establishing a European
Systemic Risk Board [2010] OJ L 331.
The establishment of the ESRB represented another confirmation of the very wide scope of Art. 114
TFEU. Accordingly, the ESRB Regulation quotes in its Recital (31) Case C-217/04 United Kingdom of
Great Britain and Northern Ireland v. European Parliament and Council of the European Union [2006]
ECR I-03771, para. 44, where the Court ruled on the permissibility of ‘the establishment of a Community
body responsible for contributing to the implementation of a process of harmonisation in situations where,
in order to facilitate the uniform implementation and application of acts based on that provision, the
adoption of non-binding supporting and framework measures seems appropriate’. For a critique of the
gradual expansion of the scope of Art. 114 TFEU and its implications in terms of the constitutional
division of powers in the EU and also for the EU’s legitimacy, see Weatherill (2011), pp. 827–864,
particularly at p. 863.
The Legal History of the Banking Union
the dominance of national laws and national supervisory regulations, which
transposed European law and enforced it in an uneven manner.36 It would also
replace the single passport framework since minimum harmonisation and mutual
recognition of national laws would no longer be applied or relevant. Instead, the
single rulebook is realised through the increasing use of directly applicable
European regulations aiming at the ‘maximum harmonisation’ of the single market
rules. This would be complemented by delegated and implementing acts by the
Commission and by the guidelines and recommendations of the ESAs.37 National
authorities would, however, preserve their jurisdiction, maintain their responsibility
for the enforcement of the single rulebook, and also for the management of financial
crises. To some extent, the single rulebook signalled a return to the approach of the
first period of ‘integration through harmonisation’ of the single financial market.38
These three legal and institutional innovations then created yet another
equilibrium. European competences were expanded through the creation of the
ESAs, the ESRB, and the concept of the single rulebook. National sovereignty was
safeguarded since national authorities retained their respective domestic jurisdiction
and competences, including for crisis management.
By 2012, the evolution of the legal and institutional framework of the single
financial market had probably touched the limits of what could be achieved under
the Treaty, as well as under the jurisprudence of the Court regarding the powers of
European agencies in the form of the ESAs, the creation of European bodies such as
the ESRB under Article 114 TFEU, and the scope for maximum harmonisation also
under Article 114 TFEU. This, however, remained far from providing a sufficient
framework to address the public debt crisis in the euro area, which was being
aggravated by the increasing interdependence between the banks and the respective
Member States of origin.
6 The Euro Area Summit of 29 June 2012
In June 2012, the public debt crisis in the euro area had reached its peak. The
consistent rise to unsustainable levels of the interest rates on the public debt of Italy
and Spain raised existential doubts on the euro itself, giving rise to the so-called
‘redenomination risk’. The sustainability of the Monetary Union was at stake.
The Euro Area Summit of 28 and 29 June 2012 was a watershed in the
management of the public debt crisis. The relatively short and convoluted statement
On the original concept of the single rulebook, see Tommaso Padoa-Schioppa, ‘How to deal with
emerging pan-European financial institutions?’, speech November 2004 in The Hague, available at www.; Padoa-Schioppa (2004), (2007).
For an analysis of the components of the single rulebook, see Lefterov (2015), especially at pp. 11–19.
The single rulebook approach was implemented especially in the banking sector with the so-called
‘CRD IV’, the fourth generation of capital requirement rules, which corresponds to the implementation of
the global capital standards following the crisis (also known as Basel III agreement). See the Regulation
(EU) No. 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential
requirements for credit institutions and investment firms and amending Regulation (EU) No. 648/2012
[2013] OJ L 176, pp. 1–337.
P. G. Teixeira
of the summit in the early hours of 29 June did not do justice to the institutional
change that had been agreed among the euro area Member States: the mutualisation
of risks of the euro area banking sector by opening up the possibility of direct
recapitalization of banks by the ESM, together with the transfer of competences on
banking supervision to the European level.39
The possibility for the ESM to directly recapitalise euro area banks implied that
the financial burden of rescuing an undercapitalised bank would no longer fall on
national public accounts, thus increasing the debt of a single Member State. Instead,
the cost of a euro area bank rescue would be mutualised among all the euro area
Member States which underwrite the ESM. This was made conditional by the
summit statement on the establishment of a single supervisory mechanism
‘involving the ECB’. Although this wording was somewhat vague, the statement
invoked at the same time Article 127.6 TFEU as the legal basis for the mechanism,
which clearly implied that the ECB would become the single banking supervisor in
the euro area.40
The Member States decided at the Summit that the mutualisation of liability for
the euro area banks could only come about once it was matched by supervision at
the euro area level.41 The rationale was that euro area liability was not compatible
with national supervision, which would lack incentives to minimise the potential
costs for a euro area backstop. A euro area banking supervisor, free from national
capture, would instead have its incentives aligned with those of the ESM, namely of
minimising the banking risks and potential costs for all the euro area Member States
and their respective taxpayers.
The establishment of SSM had therefore at its heart a quid pro quo between the
mutualisation of banking risks in the euro area and the loss of national sovereignty
over banking supervision. This also corresponded to the long-term vision for the
EMU put forward in the interim report of the President of the European Council,
which was presented at the June 2012 Summit. This vision included ‘four building
blocks for EMU’: integrated financial, budgetary and economic policy frameworks,
together with democratic legitimacy and accountability. The concept of an
integrated financial framework corresponded largely to what became known as a
For an account of the Euro Area Summit, see, for example, ‘Monti’s Uprising: How Italy and Spain
Defeated Merkel at EU Summit’, Spiegel Online, 29 June 2012, available at
international/europe/merkel-makes-concessions-at-eu-summit-a-841663.html (accessed 1 May 2017).
Euro Area Summit Statement, 29 June 2012, available at
european-council/pdf/20120629-euro-area-summit-statement-en_pdf (accessed 1 May 2017). The first
paragraph of the statement reads as follows: ‘We affirm that it is imperative to break the vicious circle
between banks and sovereigns. The Commission will present Proposals on the basis of Art. 127(6) for a
single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of
urgency by the end of 2012. When an effective single supervisory mechanism is established, involving
the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to
recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state
aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised
in a Memorandum of Understanding.’
See, for example, the speech by Chancellor Merkel to the Bundestag on 27 June 2012 stressing that a
joint liability can only occur once a joint control has been established, available at https://www. (accessed 1 May 2017).
The Legal History of the Banking Union
‘Banking Union’: a system comprising single European banking supervision, a
single bank resolution mechanism, and a common deposit insurance. The aim was to
provide the institutional basis for an integrated and stable banking system for
EMU.42 The concept of the Banking Union was further elaborated 3 years later by
the so-called ‘Five Presidents’ Report’, which proposed a European Deposit
Insurance Scheme (EDIS) aimed at mutualising the risks related to the minimum
coverage of bank deposits.43
The immediate need to stem the crisis through the direct recapitalization of euro
area banks precipitated, therefore, a lasting institutional decision which was being
considered only for the long-term. At the same time, the only possible legal basis
under the Treaty was the recourse to Article 127.6 TFEU, which allowed entrusting
banking supervision to the ECB on the basis of a fast-track procedure. Accordingly,
the Euro Area Summit requested a legislative proposal on the basis of Article 127.6
TFEU and asked the Council to consider it as a matter of urgency by the end of
2012.44 The ECB then became the banking supervisor of the euro area on 4
November 2014.45
7 The Legal Foundation of the Single Supervisory Mechanism
The legal basis of the SSM, Article 127.6 TFEU, is included in the monetary policy
chapter of the Treaty and replicated in the Statute of the ESCB and the ECB.46 At
the same time, the conduct of banking supervision is part of the competences
Herman Van Rompuy, Towards a Genuine Economic and Monetary Union, Report by President of the
European Council, 26 June 2012, EUCO 120/12, available at
data/docs/pressdata/en/ec/131201.pdf, especially pp. 3–5 (accessed 4 February 2013). On the concept of a
Banking Union, see Véron (2015). See also Goyal et al. (2013).
Completing Europe’s Economic and Monetary Union, Report by Jean-Claude Juncker in close
cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz, 22 June 2015,
available at, at pp. 10–12
(accessed 1 May 2017).
For an account of the political interests of Member States at stake in the creation of the Banking
Union, see De Rynck (2016), pp. 119–135, especially at pp. 129–131.
Council Regulation (EU) No. 1024/2013 of 15 October 2013 conferring specific tasks on the European
Central Bank concerning policies relating to the prudential supervision of credit institutions [2013] OJ L
287, pp. 63–89 (henceforth, ‘SSM Regulation’). It was followed in July 2014 by the regulation
establishing the Single Resolution Mechanism Regulation (EU) No. 806/2014 of the European Parliament
and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution
of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism
and a Single Resolution Fund and amending Regulation (EU) No. 1093/2010 [2014] OJ L 225, pp. 1–90
(henceforth, ‘SRM Regulation’).
Art. 127.6 TFEU reads as follows: ‘The Council, acting by means of regulations in accordance with a
special legislative procedure, may unanimously, and after consulting the European Parliament and the
ECB, confer specific tasks upon the ECB concerning policies relating to the prudential supervision of
credit institutions and other financial institutions with the exception of insurance undertakings.’ Until the
establishment of the SSM, Art. 127.6 TFEU had only been used once to entrust the ECB with the task to
support the functioning of the European Systemic Risk Board. Council Regulation (EU) No. 1096/2010 of
17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning
of the European Systemic Risk Board [2010] OJ L 331/162.
P. G. Teixeira
relating to the provision of financial services, which is an area of the single market.
This implies that Article 127.6 TFEU has a double nature: it relates both to the
framework of the Monetary Union and to the single market. This reflects the unitary
and inclusive framework of the Monetary Union, which assumes a perfect
coincidence with the European Union over time.47
This dual-nature of Article 127.6 TFEU is the key for understanding the ‘genetic
code’ of the Banking Union. It had a number of implications for the shape of the
Banking Union.
The first implication is related to the perimeter of the jurisdiction of the Banking
Union. The provision of Article 127.6 TFEU was constructed as a fast-track
procedure to transfer to the ECB additional tasks in the field of banking supervision.
The ECB would then perform such tasks on the basis of the same framework and
instruments provided by the Treaty and the Statute for its central banking tasks.48
This implied that the ECB could only perform banking supervision tasks within its
central banking jurisdiction. Its legal acts, such as decisions and regulations, could
only be enforced in the Member States of the euro area. This defined the jurisdiction
of the Banking Union, particularly since the jurisdiction of the Single Resolution
Mechanism followed that of the SSM.
Another related implication was the ‘separation principle’ within the ECB
between monetary policy and banking supervision. Entrusting the ECB with
banking supervision raised concerns regarding the appropriateness of combining
monetary policy and banking supervision in the same institution.49 The answer to
these concerns was the ‘separation principle’ within the ECB with the aim of
safeguarding the decision-making processes of both functions. The main consequence of this principle was the establishment of a Supervisory Board as an internal
body of the ECB comprising representatives from national supervisory authorities,
which was entrusted with the responsibility to plan and execute the supervisory
tasks separately from the central banking side.50 This separation was reinforced by
Another indication in this direction is that, in contrast with most of the other provisions of the
Monetary Union, Art. 127.6 TFEU applies to all Member States, including those with a derogation,
namely Denmark and the UK, in accordance with Art. 139(2) c) TFEU. All Member States have a vote in
the unanimous decision to adopt a Council Regulation to entrust supervisory tasks to the ECB.
For example, Art. 132.1 TFEU and Art. 34.1 of the ESCB and ECB Statute already enabled the ECB to
adopt regulations to the extent necessary to implement the tasks relating to prudential supervision, by
reference to Art. 127.6 TFEU and Art. 25.2 of the Statute, respectively.
The attribution of banking supervision competences to the ECB has been originally discussed in the
drafting of the Delors Report and in the Intergovernmental Conference leading to the Maastricht Treaty.
The text of Art. 127.6 TFEU represented a compromise between acknowledging the concerns at the time
that such competences could lead to moral hazard and conflict of interests in the conduct of monetary
policy, while retaining the possibility that a supervisory role could be given to the ECB in light of
developments in the financial system. For the historical account, see James (2012), pp. 313–317.
In accordance with Art. 26.1 of the SSM Regulation, the Supervisory Board comprises a Chair, ViceChair, four ECB representatives, and one representative of each national supervisor, which can be
accompanied by a central bank representative. The national supervisors of the non-euro area Member
States, which enter into a close cooperation with the ECB, have full membership and voting rights in the
Supervisory Board without any distinction from the euro area members.
The Legal History of the Banking Union
the introduction of reverse voting procedures for supervisory decisions.51 The
Supervisory Board prepares and proposes draft supervisory decisions, which are
deemed adopted by the Governing Council unless it objects within a certain period
of time.52 Once final, the supervisory legal acts are subject to the judicial review of
the Court, as any other act of the ECB.53
A third implication is related to the institutional framework of the Banking
Union. Article 127.6 TFEU only provided the legal basis to confer upon the ECB
banking supervision tasks.54 It did not provide the basis to create a new institutional
system for banking supervision, for example, a federal system or a dual-system
similar to the one in the US. This implied that the ECB alone would be exclusively
responsible for the supervision of the whole euro area banking system. Such a
sudden centralisation of competences, previously entrusted in the euro area, to more
than twenty national authorities would have been, in the least, very challenging. It
would also have not been proportional, or required by the rationale of the Banking
The strengthening of EU economic governance also involved the introduction of reverse voting
procedures at the level of the Council with regard to Commission recommendations. The aim, in this case,
was to limit the role of the Council and achieve a stricter and more automatic enforcement of rules,
particularly of the imposition of sanctions under the Excessive Deficit Procedure. See, for example, Art.
6(2), Regulation (EU) No. 1173/2011 of the European Parliament and of the Council of 16 November
2011 on the effective enforcement of budgetary surveillance in the euro area [2011] OJ L 306, pp. 1–7.
See Art. 26(8) of the SSM Regulation. If the Governing Council objects to a draft supervisory decision
proposed by the Supervisory Board, a mediation panel will be convened to resolve any differences of
views, in accordance with Art. 25(5) of the SSM Regulation.
In line with Art. 263 TFEU. In this context, it may be questioned whether the judicial review of
supervisory acts could be undertaken by a specialised court, as foreseen under Art. 257 TFEU. Such a
specialised court could be justified due to the technical specificity of banking supervision, the potential
volume of supervisory acts, and the need for a timely review of supervisory decisions in order for it to
remain effective. The SSM Regulation partly addressed such concerns by introducing an internal
administrative board of review of the ECB (ABOR), which provides an appeal mechanism leading to a
new supervisory decision within a relatively short period of time. In this context, the General Court
considered that a supervisory decision in conformity with an Opinion of the ABOR ‘is an extension of
that opinion and the explanations contained therein may be taken into account for the purpose of
determining whether the contested decision contains a sufficient statement of reasons.’ See Judgment of
16 May 2017, Case T-122/15 Landeskreditbank Baden-Württemberg—Förderbank v. European Central
Bank, EU:T:2017:337, para. 127. For an overview of the functioning of this board thus far, see Brescia
Morra, Smits and Magliari (2017), in this issue. Similarly, the SRM Regulation introduced an Appeal
Panel for bank resolution decisions of the SRB. See Art. 45 SRM Regulation.
The ECB was entrusted with the large part of the supervisory competences provided by Union law to
national supervisors as competent authorities. According to Art. 4(1) of the SSM Regulation, this
includes, among others, the authorisation of banks and the withdrawal of their license, ensuring
compliance of credit institutions with prudential requirements, supervisory review, supervision on a
consolidated basis, supervision of branches from credit institutions authorised in the EU, supplementary
supervision of a financial conglomerate, early intervention measures, limits to compensation of managers,
administrative sanctions, and imposing structural changes in banks. For the purposes of the application of
the Union’s banking law, the ECB became the competent authority for banking supervision in each euro
area Member State, with the corresponding powers, in line with Art. 9(1) of the SSM Regulation. The
supervisory tasks not conferred on the ECB remained with national authorities, such as the supervision of
branches from third-countries or anti-money laundering, as listed in Recital 28 of the SSM Regulation.
The ECB was, in addition, entrusted with parallel competences to national authorities regarding macroprudential tasks, under Art. 5 of the SSM Regulation.
P. G. Teixeira
Union, to carry out the direct supervision of small domestic institutions at the
European level.55
Therefore, it was necessary to achieve decentralisation in the conduct of banking
supervision, despite the centralising nature of Article 127.6 TFEU. The main
decentralisation mechanism was introducing a distinction between ‘significant’ and
‘less significant’ banks within the SSM. The ECB would exercise directly its
supervisory tasks with regard to the banks and banking groups which would be
considered ‘significant’. This included the banks with total assets above 30 billion
euro or with a ratio of total assets over the GDP of the domestic economy of above
20% GDP.56 The national supervisors, on the other hand, were required to assist the
ECB in the supervision of ‘significant’ banks and remained responsible for the
direct supervision of the banks considered ‘less significant’.57 Since Article 127.6
TFEU could not confer supervisory competences upon national authorities, the SSM
Regulation carved out from the exclusive competences of the ECB a list of tasks
regarding the day-to-day supervision of ‘less significant’ banks. These tasks
remained with the national supervisors within the framework defined by the ECB
and under its oversight.58 The ECB may take over the supervision of less significant
banks, when it deems it necessary to ‘ensure consistent application of high
supervisory standards’. The mechanics of Article 127.6 TFEU thus led to the
distinction between ‘significant’ banks, whose supervision was centralised at the
European level, and ‘less significant’ banks, whose supervision remained decentralised at national level. This distinction was reflected in the framework of the
single resolution mechanism.59
The institutional outcome was a unique and unprecedented combination of
European and national competences into the single system of the SSM and later also
At the same time, there were political preferences for preserving the national supervision of purely
domestic institutions, see Véron (2014). For an account of the policy dynamics in the transfer of banking
supervision competences, see Epstein and Rhodes (2016), pp. 90–103.
It also included the three largest banks in each Member State and also the banks receiving direct or
indirect assistance from the EFSF/ESM. The ECB can add more banks to its jurisdiction on the basis of
their cross-border relevance or domestic significance, in this latter case at the request of a national
supervisor. See Art. 6(4) of the SSM Regulation.
See Art. 6(3) of the SSM Regulation.
In a recent judgment, the General Court concluded further that the ECB has exclusive competence
over the whole banking system and that the national authorities assist the ECB also with regard to ‘less
significant’ institutions. In particular, the Court states that ‘the Council has delegated to the ECB
exclusive competence in respect of the tasks laid down in Article 4(1) of the Basic [SSM] Regulation and
that the sole purpose of Article 6 of that same regulation is to enable decentralised implementation under
the SSM of that competence by the national authorities, under the control of the ECB, in respect of the
less significant entities and in respect of the tasks listed in Article 4(1)(b) and (d) to (i) of the Basic
[SSM] Regulation’. See Judgment of 16 May 2017, Case T-122/15 Landeskreditbank BadenWürttemberg—Förderbank v. European Central Bank, EU:T:2017:337, para. 63.
The division of tasks within the SRM is largely based on the distinction between ‘significant’ and ‘less
significant’ banks. The SRB is responsible for the drawing up of the resolution plans and adopting all
decisions relating to resolution of ‘significant’ entities, while the national resolution authorities are
responsible for the ‘less significant’ entities. This also implies that the perimeter of the competences of
the ECB/SSM and the SRB largely overlap. However, they do not fully coincide since, in addition to the
entities directly supervised by the ECB/SSM, the SRB is also responsible for all other cross-border groups
in the jurisdiction of the Banking Union. See Art. 7(2) SRM Regulation.
The Legal History of the Banking Union
of the SRM, which defies any clear definition or categorisation.60 It includes:
exclusive European competences regarding the direct supervision, and resolution, of
‘significant’ banks, supported by national authorities; national competences for the
supervision, and resolution, of ‘less significant’ banks; European competences for
the oversight of national authorities; as well as parallel competences among the
European and national authorities, such as macro-prudential tasks.61
Another consequence of the use of Article 127.6 TFEU was that the conduct of
banking supervision gained an independence status equivalent to that of central
banking. As an additional task of the ECB, it could not be disentangled from the
independence granted by the Treaty for its central banking tasks.62 The central
banking independence of the ECB thus spilled over to banking supervision. In turn,
this largely also determined the independence of the SRB in bank resolution.63 It
was a significant institutional development because, in contrast to monetary policy,
banking supervision was not a fully independent function before the Banking
Union.64 Such independence status is certainly one of the factors in the credibility of
the conduct of supranational banking supervision and resolution.65 However, it also
raises new challenges for accountability at the European level.66
Finally, one other implication of Article 127.6 TFEU was the mismatch between the
Banking Union and the single financial market. The establishment of the SSM leads to a
deepening of integration within the single financial market. The ECB as banking
supervisor ensures a single entry-point for banking licenses and a uniform enforcement
of the single rulebook. This ‘Europeanises’ the banking system and severs the links with
individual Member States. Such deepening of integration is however only with regard to
the euro area Member States. The mechanics of Article 127.6 TFEU prevent any
Member State from joining the Banking Union unless it adopts the euro. In turn, this
undermines the unity and inclusiveness of the single financial market.67
On the provisions for the exercise of macro-prudential tasks, see Art. 6(5) of the SSM Regulation.
Guido Ferrarini argues that the SSM still represents a semi-strong form of centralisation since it relies on
supervisory cooperation between the ECB and national supervisors. This may give rise to agency
problems, such as non-cooperation by local supervisors. See Ferrarini (2015), pp. 513–537, especially at
pp. 524–525.
On the provisions for the exercise of macro-prudential tasks, see Art. 6(5) of the SSM Regulation.
See Art. 7(7) SSM Regulation.
See Art. 47(1), (2) and (3) of the SRM Regulation.
In many countries, banking supervision was a function close to or integrated in finance ministries. See
Quintyn et al. (2007), pp. 34 et seq. The Basel Core Principles on Effective Banking Supervision, the
main global institutional standards, only required the ‘operational independence’ of supervision, in
accordance with Principle 2. See Basel Committee on Banking Supervision, ‘Core Principles for Effective
Banking Supervision’, September 2012, available at (accessed 12
October 2016).
See also the related findings by Dirk Schoenmaker and Nicolas Véron, who point out that European
banking supervision is independent, more intrusive than previous national regimes, less vulnerable to
regulatory capture and political intervention, and also that it appears to be broadly fair among banks and
countries. See Schoenmaker and Véron (2016), particularly at pp. 25 et seq.
The accountability framework of the SSM and SRM are broadly similar and are provided,
respectively, under Art. 20 of the SSM Regulation, and Art. 45 of the SRM Regulation.
Niamh Moloney also alerts to this risk of disconnect between the Banking Union and the single
financial market. See Moloney (2014), pp. 1609–1670, at pp. 1661–1669.
P. G. Teixeira
The solution found to mitigate the mismatch between the SSM and the single
financial market was a voluntary arrangement. The legal basis of Article 127.6
TFEU could not provide any other solution. The Member States from outside the
euro area may request to join the SSM and have their banks subject to the
supervision of the ECB. The SSM Regulation defines it as ‘close cooperation’
between the ECB and the national supervisors from those Member States. The SSM
and, as a consequence, the jurisdiction of the Single Resolution Mechanism is
extended by the commitment of the Member States that their respective national
supervisors will follow the instructions of the ECB. This commitment is however
purely contractual and not a legal obligation. If a Member State does not comply
with the conditions for close cooperation, the ECB may suspend or terminate it.
A Member State may also request the ECB to terminate it at any time after three
years of its establishment.68
Thus, the original legal basis of Article 127.6 TFEU, invoked by the Euro Area
Summit for the establishment of the SSM, to a large extent defined the legal and
institutional design of the Banking Union: the perimeter of its jurisdiction, the level
of centralisation and decentralisation of competences based on the distinction
between significant and less significant banks, the independence in the exercise of
supranational powers, and the resulting mismatch with the single financial market.
8 The Legal Foundation of the Single Resolution Mechanism
The second pillar of the Banking Union is the ‘Single Resolution Mechanism’ (SRM).
It was proposed in the Van Rompuy Report to complement the SSM in breaking the
link between sovereigns and banks. The concept of the SRM first stemmed from the
global banking resolution regime introduced after the 2008 financial crisis by the
Financial Stability Board (FSB). The rationale of this regime was to minimise the
possibility that public funds had to be used to rescue a bank. A bank failure should
resemble as close as possible the failure of any other commercial company. This
implied concentrating the costs on the owners and creditors of banks, without creating
systemic implications. The resolution of a bank had to be feasible without disrupting
financial stability and without the use of public funds. This included the bail-in of
equity and unsecured creditor claims by the resolution authority to absorb losses.69
‘Close cooperation’ is regulated in Art. 7 SSM Regulation and Art. 4 SRM Regulation.
The FSB first put forward the objectives of a resolution regime. First, it should make feasible the
resolution of any financial institution, without making taxpayers exposed to losses from solvency support.
Second, it should protect vital economic functions. Third, it should include mechanisms to enable
shareholders, unsecured and uninsured creditors to absorb losses in their order of seniority. This ‘bail-in’
of shareholders and creditors would replace the need for bail-outs. See FSB Report, ‘Reducing the moral
hazard posed by systemically important financial institutions’. The report was endorsed by the G-20
Summit in Seoul, November 2010, available at
pdf. These principles were then turned into global regulatory standards in the 2011 FSB’s ‘Key Attributes
of Effective Resolution Regimes for Financial Institutions’ to be implemented in all jurisdictions. FSB,
‘Key Attributes of Effective Resolution Regimes for Financial Institutions’, available at www. (accessed 1 May 2017). The standards were
endorsed by the G20 Summit in Cannes, November 2011.
The Legal History of the Banking Union
The FSB’s global resolution regime was widely implemented.70 In the EU, it was
introduced by the Bank Recovery and Resolution Directive (BRRD).71 The SRM
Regulation then provided an institutional framework to apply the BRRD rules
within the Banking Union. It comprised a Single Resolution Board (SRB) for
centralised decision-making and a Single Resolution Fund (SRF) for financing
resolution, which is owned by the SRB.72
The establishment of the SRM faced several legal challenges. The first was its
legal basis. The question was whether Article 114 TFEU could provide the legal
basis for the establishment of the SRM and, within it, the SRB. This provision is a
‘harmonisation clause’, which, as stated by the Court in several instances, can only
provide the basis for the process of harmonisation of national laws for the
completion of the single market. Therefore, the SRM had to be justified as a
harmonisation technique of the single financial market.73
The SRM Regulation provides three arguments for being based on Article 114
TFEU. First, the resolution decisions of the SRB are harmonising measures, since
the uniform application of resolution rules requires a central authority. Second, the
SSM and the SRM are mutually dependent in the functioning of the Banking Union.
The SSM can only achieve a uniform enforcement of supervision rules if it is
complemented by uniform enforcement resolution rules by the SRM.74 Third,
uniform resolution rules, as well as equal conditions of resolution financing across
Member States, support financial stability. This, in turn, facilitates the functioning
of the single financial market.75
A second challenge was whether the SRB, as a European agency, could be
entrusted with decision-making powers on resolution. Such powers involve a wide
margin of discretion and judgement. They would go beyond the clearly defined
executive powers underpinning the ‘Meroni’ doctrine. Resolution decisions, such as
deciding on the extent of bail-in, can have distributional implications and affect
In the US, the Dodd-Frank Act established a resolution framework for systemic financial institutions,
with the Federal Deposit Insurance Corporation (FDIC) as the resolution authority, available at www.gpo.
gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf (accessed 1 May 2017).
Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a
framework for the recovery and resolution of credit institutions and investment firms and amending
Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC,
2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No. 1093/2010 and (EU)
No. 648/2012, of the European Parliament and of the Council [2014] OJ L 173, pp. 190–348.
For an overview, see Zavvos and Kaltsouni (2015).
Case C-217/04 United Kingdom v. Parliament and Council [2006] ECR I-3771, para. 42; and Case
C-491/01 British American Tobacco (Investments) and Imperial Tobacco [2002] ECR I-11453, para. 60.
Furthermore, in the ‘Smoke Flavourings’ case, the Court considered that Art. 114 of the Treaty also
confers discretion to the legislature as to the most appropriate harmonization technique, see Case C-66/04
United Kingdom v. Parliament and Council [2005] ECR I-10553, para. 41.
There are mutual obligations of consultation and cooperation between the SSM and the SRB. See, for
example, Arts. 8 (assessment of resolvability), 10 (setting of MREL), 11 (provision of supervisory
information), 27 (mutual cooperation), and 39 (ECB representative in the SRB).
As explained under the Recitals 11, 12, and 21 of the SRM Regulation.
P. G. Teixeira
property rights.76 Given the discretion involved, the sequence of resolution
decisions also leads to the definition of a resolution policy at the European level.
The principles of equal treatment and non-discrimination imply that each resolution
decision creates a precedent and defines the policy for successive cases across banks
and Member States. Finally, resolution decisions also have implications for financial
stability and the economic policy in Member States.77
The discretionary nature and range of bank resolution powers implied that they
could not be vested as such on the SRB as a European agency, particularly without a
framework of conditionality and safeguards.78 As explained in the recitals of the
SRM Regulation, this was what justified the involvement of the European
institutions which may exercise implementing powers, in accordance with Article
291 TFEU.79 The outcome was that the Commission has the power to assess and
control the discretionary aspects of the resolution decisions taken by the SRB. The
Council, upon proposal by the Commission, controls whether the public interest
criterion for resolution is indeed fulfilled in SRB decisions and also the amount to be
used by the SRF. This involvement of the Council is required by the fact that
resolution decisions and those involving the use of the SRF may impinge on the
fiscal sovereignty of Member States and also on financial stability.80
See Wojcik (2016), pp. 91–138, at pp. 116 et seq., who argues that the principle of no creditor worse
off is fundamental for safeguarding property rights, and points to the legal and practical difficulties of
operationalising such principle. The Court clarified that the burden-sharing requirements under state aid
rules—albeit not specifically under the BRRD and SRM Regulation—could not be considered as
infringing property rights. Judgment of the Court (Grand Chamber) of 19 July 2016, Case C-526/14
Kotnik and Others, ECLI:EU:C:2016:570.
At the limit, the fiscal sovereignty of Member States may be affected if they provide public support in
the situations allowed by the BRRD and SRM Regulation. For example, see the government financial
stabilization tools under Art. 56 BRRD. For an analysis, see Gortsos (2016).
The compliance of the SRB powers with the Meroni doctrine is supported by the Short Selling
judgement. The Court concluded that the conditions set for the exercise of powers of the European
Securities and Markets Authority (ESMA) regarding short-selling satisfy the Meroni requirements. In
particular, the powers available to ESMA were found to be precisely delineated and amenable to judicial
review in the light of the objectives established by the authority which delegated those powers to it. The
Court also argued that the high degree of professional expertise in the pursuit of the objective of financial
stability within the Union was also a relevant factor for the attribution of powers to ESMA. See Judgment
of the Court of Justice (Grand Chamber) of 22 January 2014, Case C-270/12 United Kingdom v.
European Parliament and Council (Short selling), EU:C:2014:18. For a more extensive analysis, and a
positive answer under the Meroni doctrine, on whether the bank resolution powers could be entrusted to
the SRB, see Moloney (2014), pp. 1609–1670, at pp. 1660–1661; and also Lintner (2017), in this issue.
See, in particular, Recital 24 of the SRM Regulation. The decision-making powers of the SRB are
further constrained by the criteria and conditions that the Commission may set through delegated acts. In
this context, the EBA has an advisory role towards the Commission in the consistent application of the
BRRD and in the convergence of resolution practices. See Arts. 5 and 93 of the SRM Regulation.
The convoluted decision-making process for bank resolution may be summarised as follows. When the
conditions for resolution are met, the SRB should adopt a resolution scheme. However, the scheme only
enters into force if there is no objection within 24 hours by the Commission and the Council. First, the
Commission has 24 hours to endorse or object to the discretionary aspects of the resolution scheme.
Second, the Commission has 12 hours to propose to the Council to object to the resolution scheme on the
basis that the public interest criterion for resolution—instead of winding-up—is not fulfilled. The
Commission can also propose to the Council to approve or object to a modification to the amount of the
SRF provided for in the scheme. The SRB then has 8 hours to modify the scheme accordingly. See Art.
18(7) of the SRM Regulation.
The Legal History of the Banking Union
The third challenge was the establishment of the SRF. The SRF operates the first
mutualisation of risks in the Banking Union. Member States agreed to transfer their
existing resolution funds and also the levies raised from banks in their jurisdictions
to the SRF. This was pooled together in a European fund in order to finance the
resolution by the SRB of banks located in any of the Member States of the Banking
Union.81 The question was whether the establishment of the SRF would constitute
the exercise of national budgetary powers, which would preclude the use of Article
114 TFEU.
In order to establish the SRF on the basis of Article 114 TFEU without impinging
on the integrity of national fiscal sovereignty, the SRM Regulation included a
number of safeguards. It introduced the principle that decisions or actions of the
SRB, the Council or the Commission shall neither require Member States to provide
extraordinary public financial support nor impinge on the budgetary sovereignty and
fiscal responsibilities of the Member States.82 This aimed at insulating the
functioning of the SRB, including the use of the SRF, from fiscal liabilities. There
can be no budgetary liability of Member States for bank resolution. If the SRF ever
requires additional financial means, it should obtain them from the banks via
extraordinary contributions or borrow such means at commercial terms from
financial institutions or other parties.83 Another safeguard is that the SRF can only
be deployed when at least 8% of a bank’s total assets are bailed in. Even in such
case, the contribution of the SRF cannot exceed 5% of the total liabilities of the
bank under resolution.84 This ensures that the SRF will only be used at the last
instance, after the claims of shareholders and creditors have been exhausted.
Moreover, there are procedural safeguards in the decision-making process. The
Council can object to the involvement of the SRF or to certain amounts.85 The
The SRB could also request extraordinary ex post contributions from banks when the financial means
of the SRF were insufficient. It could also borrow from other resolution arrangements in the EU, financial
institutions, or entities such as the ESM. The SRF should by 2024 reach a target level of financial means
amounting to 1% of the covered deposits of all banks in the Banking Union (around 55 billion euro). See
Arts. 67–73 of the SRM Regulation.
See Art. 6(6) of the SRM Regulation.
At the limit, Member States or the ESM may provide bridge financing to the SRF against repayment
by the banking sector. In the case that a public backstop is required to ensure financing of resolution when
the fund has no financial means. See Recital 13 of the Agreement on the Transfer and Mutualisation of
Contributions to the Single Resolution Fund, Council of the European Union, Brussels 14 May 2014,
available at = EN&f = ST %208457%202014%20INIT (accessed 1 May 2017). The SRM Regulation explicitly forbids any expenses to be borne by the budgets
of the Union or Member States, in accordance with Art. 73(3) of the SRM Regulation.
See Art. 27(7) of the SRM Regulation.
The use of the SRF is also subject to ‘fund aid’ control by the Commission. This is a new power of the
Commission introduced by Art. 19 of the SRM Regulation. While the use of the SRF would not qualify as
state aid as such, since no public funds would be involved, the SRM Regulation ensured that the
Commission would be able to control—on the basis of the same criteria as for state aid—whether the use
of the SRF could be incompatible with the internal market by benefitting an undertaking and hence
distorting competition. The use of the fund has to be notified to the Commission, which can then take a
decision imposing conditions or against the use of the SRF. This decision can, in turn, be pre-empted by
the Council if, upon application by a Member State, it votes by unanimity that the use of the SRF is
compatible with the internal market.
P. G. Teixeira
plenary session of the SRB has to approve it with a majority including national
members representing at least 30% of the contributions to the SRF.86
These safeguards enabled the use of Article 114 TFEU as the legal basis for the
establishment of the SRF as part of the harmonisation process for bank resolution.87
This reasoning did not, however, extend to the transfer and mutualisation of the
bank levies raised at the national level to the SRF. As a harmonisation clause,
Article 114 TFEU could not impose on Member States such obligation. The solution
found, similarly to the mutualisation of funds in the EFSF and the ESM, was the
adoption of an intergovernmental agreement under public international law. In order
to avoid the immediate use of such funds, their mutualisation only operates
progressively. The amounts raised in each Member State are allocated to ‘national
compartments’ and gradually mutualised over 8 years.88
The use of Article 114 TFEU as the legal basis had, therefore, several
implications for the legal and institutional design of the SRM. The first one was the
convoluted decision-making process for bank resolution actions involving the SRB,
the Commission and the Council. This aimed at achieving two interrelated
objectives. First, to address the limitations imposed by the ‘Meroni doctrine’ by
involving the Commission in the exercise of discretionary powers by the SRB as a
European agency. Second, to safeguard national fiscal sovereignty in resolution
decisions by involving the Council.
Another implication related to the various safeguards imposed on the use of the
SRF in order to also protect national fiscal sovereignty. These safeguards
demonstrated how far-reaching the bail-out prohibition under Article 125 TFEU
was interpreted and implemented in the Banking Union, and extended de facto to
the bail-out of banks under the BRRD. They included the control of the decisions
made on the use of the fund by the SRB, which is a European authority independent
from the national interests that previously led to bail-out decisions. These
safeguards aimed at dispelling any concern that the use of the SRF could ever
evade the spirit of the no bail-out prohibition. They also reflected the reluctance of
Member States to transfer powers to allocate the distribution of funds, even those
with private origin such as the SRF, to the European level. Therefore, while the
Euro Area Summit of 29 June 2012 aimed at replacing national liability by the joint
liability of Member States for banking risks, such transition did not ultimately
happen due to the prohibition of bail-out of banks and the bail-in rules introduced by
the BRRD and the SRM Regulation. European control of the banks did not translate
into European liability but into private liability.
See Art. 52(2) of the SRM Regulation.
The SRM Regulation justified the SRF as part of the harmonisation process, since a centralised system
of resolution would require a single funding system. This, in turn, safeguards financial stability
throughout the single market, which is a condition for market integration. See, in particular, Recital (19)
of the SRM Regulation.
See Recital (7) of the Agreement on the Transfer and Mutualisation of Contributions to the Single
Resolution Fund, Brussels, 14 May 2014.
The Legal History of the Banking Union
9 The Consequences for the Single Financial Market
The Banking Union has a somewhat paradoxical effect: the single financial market
becomes at the same time more deeply integrated but also more fragmented. It
becomes more deeply integrated within the euro area. It becomes more fragmented
due to the distance in integration between the Banking Union and the rest of the
single financial market. This mismatch between the jurisdictions of the Banking
Union and of the single financial market has several legal and institutional
The first consequence is the unification of a considerable part of the single
financial market. As intended by the June 2012 Summit, the banks within the
Banking Union are basically removed of their ‘nationality’ in order to break the
links with Member States. The banks are ‘Europeanised’ in the sense that the
competences for their licensing, for ensuring compliance with Union law in their
activities, for closing them down, and for their resolution, is exclusive to a European
authority. This corresponds to the end of the single passport framework. The
principles of home-country control and mutual recognition no longer apply within
the Banking Union. The institutions within the Banking Union will be subject to a
single supervisor and a single resolution authority, independently of the extent of
their cross-border business through subsidiaries, branches or direct provision of
In turn, this means that the Banking Union also leads to the unification of
European law within its jurisdiction. This will happen through a unified
interpretation, application, and enforcement of European law in the conduct of
banking supervision and resolution. The law of the Banking Union will remain,
however, multi-layered. For instance, the ECB/SSM and the SRB will be required to
apply national law transposing directives, but directly applicable European
regulations will likely become more widely used over time than directives in the
field of banking services.89 Furthermore, the also directly applicable legal acts of the
ECB/SSM and the SRB will be subject to the judicial review of the European Court
of Justice.90 This will lead to the co-existence of two regimes of European law in the
single financial market: a unified system of European law and legal authority within
the Banking Union, and a decentralized system of national jurisdictions elsewhere.
The banking law of the Union comprises both directly applicable Union regulations and Union
directives, which require national transposition measures to have direct legal effect. In this context, the
ECB may be required to enforce, at the limit, inconsistent national transposition of directives due to the
prohibition of reverse vertical direct effect of directives, as confirmed by the Court originally in Marshall,
Case 152/84, EU:C:1986:84, para. 48, and Faccini Dori, Case C-91/92, EU:C:1994:292, para. 20. This
implies that the SSM, including the ECB and national authorities, will apply a body of law with mixed
nature including both directly applicable Union law and national law transposing Union directives. Art.
4(3) of the SSM Regulation provides that the ECB should apply Union law, including the national law
transposing directives and the national legislation exercising options provided in European regulations. It
also recalls that the ECB should comply with the Commission‘s delegated and implementing acts under
Arts. 290 and 291 TFEU; and it subjects the ECB to the EBA‘s single supervisory handbook. The SRB is
subject to a similar provision under Art. 5 of the SRM Regulation.
The Banking Union will however remain subject to two different judicial jurisdictions: the Court of
Justice for decisions taken by the ECB/SSM and the SRB regarding ‘significant’ banks and national
courts for decisions taken by national authorities regarding ‘less significant’ banks.
P. G. Teixeira
Another consequence relates to the role of the European Banking Authority
(EBA) as the European agency responsible for supporting the regulation and
supervision of banking services in the whole of EU. In principle, the institutional
role of the EBA is not affected by the Banking Union. The SSM Regulation
provides that the ECB should comply with the EBA’s guidelines and recommendations as any other national supervisor. In the same way, the ECB is subject to the
mediation procedures of the EBA and may also need to comply with EBA decisions
in emergency situations.91
At the same time, the unification of European banking law, regulation,
supervision and resolution within the Banking Union reduces the scope of the
role of the EBA, for example, in the convergence of supervisory practices.92 The
convergence does not relate anymore to 28 national authorities but instead to the
authorities of the Banking Union and nine national authorities. This shift is reflected
in the governance arrangements of the EBA following the establishment of the
SSM. The voting of the Board of Supervisors of the EBA for certain decisions was
changed into a double-voting system, grouping the supervisors of the SSM and
those from outside the SSM into separate voting constituencies.93
As mentioned before, one other consequence was the introduction of ‘close
cooperation’ arrangements for the participation of Member States outside the euro
area in the Banking Union. This aimed at bridging the Banking Union and the single
financial market, in order to avoid undermining its unity. It leads, however, to a
combination in the Banking Union of two distinct legal frameworks: European law
on the basis of the Treaty for the Member States of the euro area, which coexists
with a voluntary arrangement for the relations with the Member States outside the
euro area. In the euro area, the powers of the SSM and SRM are exercised in
accordance with the Treaty on a permanent and irrevocable basis. Outside the euro
area, they are based on a voluntary contract on close cooperation with Member
States, which may be suspended or terminated. It leads to the exceptional case that a
Member State may opt-in and opt-out from a European system of competences.94
The Banking Union has therefore unique legal and institutional consequences.
The single financial market for banking services is split into two blocks: an inner
core of deep integration and an outer core of looser integration. The Banking Union
framework attempts to mitigate this differentiation by including provisions aimed at
Art. 4(3) of the SSM Regulation.
As also argued by Ferran (2016), pp. 285–317.
The double-voting system applies to the most relevant decisions of the EBA. It includes the decisions
regarding the adoption of draft standards and guidelines and recommendations, actions in emergency
situations, and those proposed by an independent panel to the Board of Supervisors concerning breaches
of Union law and the settlement of disagreements between supervisors. In these cases, the decisions
should be adopted either by qualified majority or simple majority by the Board of Supervisors, but
including both a simple majority of its members from competent authorities of participating Member
States and a simple majority of its members from competent authorities of non-participating Member
States. See Art. 1(7) of Regulation (EU) No. 1022/2013 of the European Parliament and of the Council of
22 October 2013 amending Regulation (EU) No. 1093/2010 establishing a European Supervisory
Authority (European Banking Authority) as regards the conferral of specific tasks on the European
Central Bank pursuant to Council Regulation (EU) No. 1024/2013 [2013] OJ L 287, pp. 5–14.
For a critical analysis, see Ferrarini (2015), pp. 513–537.
The Legal History of the Banking Union
preventing discrimination,95 enabling the participation of non-euro area Member
States, and at preserving a balance between the representation of euro area and other
Member States in the EBA. However, it is likely that such differentiation will
increase rather than stabilise: as market integration deepens within the Banking
Union, the distance to the other parts of the single financial market will necessarily
increase. This is particularly so due to the dominance of the banking sector in the
European financial system. Moreover, as a large group of Member States reinforce
their integration, the commitment of the other Member States to maintain their
respective lower levels of integration may decrease. ‘Brexit’ may also be
interpreted, in this context, as a far-reaching loosening of the commitment by a
Member State, which is not in the inner core of integration.96
10 Continuity and Break in the Evolution of the Single Financial
The Banking Union is both continuity and break in the legal and institutional
evolution of the single financial market. It is continuity in the sense that it follows in
sequence the other phases of integration. Each phase corresponded to a new legal
and institutional equilibrium between the expansion of European competences and
the preservation of national sovereignty, which was aimed at addressing the
shortcomings of the previous phase.
In the same way, the Banking Union is a new equilibrium, which is the outcome
of prior failings in the integration process. The most noteworthy failure was the
reliance on the soft governance of multiple national jurisdictions by agencies and
committees. It enabled the expansion of the single financial market, but without
credible enforcement of rules and without crisis management or burden-sharing
capacity at the European level. This promoted integration in good times but it soon
led to a reversion into dis-integration when the financial crisis erupted. The Banking
Union thus corresponds to a significant expansion of European competences,
without precedent since the introduction of the single monetary policy. It replaces
the soft governance of the previous period with legally binding and centralised
enforcement of European law, including a bank resolution regime.97
It is also continuity since the Banking Union is, like previous phases, at the
boundaries of what can be achieved under the Treaty. The enabler of the Banking
Union was the activation of Article 127.6 TFEU, which centralised banking
supervision competences at the ECB. As analysed above, it defined the main design
features of the Banking Union, in particular the perimeter of its jurisdiction. This
Art. 1 of the SSM Regulation and Art. 6 of the SRM Regulation contain the obligation of nondiscrimination against Member States not participating in the Banking Union, and of protecting the unity
and integrity of the single market.
See the proposed set of arrangements regarding the relationship between the UK and the EU before the
referendum, which included safeguards on the Banking Union, Conclusions of the European Council
meeting of 18 and 19 February, Brussels, 19 February 2016, EUCO 1/16. See Ferran (2014). On the
impact of the Eurozone on the rest of the EU, see Dashwood (2016), pp. 3–9.
As also concluded by Zeitlin (2016), pp. 1072–1094.
P. G. Teixeira
was followed by the recourse to the harmonisation clause of Article 114 TFEU for
the establishment of the SRM. The scope of this provision has been consistently
enlarged from one integration phase to the other. It has been the legal basis for most
if not all of the regulation of the single financial market thus far, to an extent that it
has become a ‘regulatory’ rather than a mere harmonisation clause. Accordingly, it
has also provided the basis for a bank resolution framework, the unprecedented
powers of the SRB as a European agency—which follows on the previous extension
of the powers of agencies made for the European Supervisory Authorities—and the
Like in previous phases of integration, the expansion of European competences
under the Banking Union involves reaching an equilibrium with the preservation of
national sovereignty. Such expansion is constrained by the limits set by the Treaty
and by national fiscal sovereignty. This is reflected in the convoluted decisionmaking process for resolution, which involves the Council and the Commission, as
well as in the safeguards under the bank resolution process, namely in the decisionmaking of the SRB and in the operation of the SRF, as analysed above.
At the same time, the Banking Union is also a break in the evolution of the single
financial market. Compared to the other phases, which aimed at deepening
integration while avoiding transferring competences to the European level, it is a
radical step in integration. It goes far beyond the previous harmonisation approaches
by aiming at the creation of a unified system of law, legal authority, competences,
and judicial review. This may well represent the purest form of legal and
institutional integration within the single market.98
The Banking Union thus abolishes part of the framework of the single financial
market, notably the concept of the single passport. The principles of home-country
control and mutual recognition are no longer relevant within the jurisdiction of the
Banking Union. Harmonisation of national laws is progressively replaced by
directly applicable European law. The legally binding decisions and legal acts of the
ECB/SSM and SRB replace those of national authorities. The scope of the role of
the EBA, as an agency of the single financial market, is also reduced as a result.
The jurisdictional mismatch between the Banking Union and the single financial
market is part of such break. It divides the single financial market into two blocks.
This mismatch was caused by the original legal basis under Article 127.6 TFEU,
which is a provision relating both to the Monetary Union and the single market. Its
activation presupposed the day when the euro area would coincide with the single
market, as envisaged by the construction of the Monetary Union. Therefore, without
the fulfillment of this condition, the legal basis of Article 127.6 TFEU was bound to
create a mismatch that could undermine the unity and integrity of the single market.
The contractual mechanism of close cooperation between the Member States from
outside the euro area and the SSM attempts to address this mismatch, but it ends up
by increasing complexity.
The Banking Union remains, nonetheless, a complex institutional system with juxtaposed European,
intergovernmental, and national laws, a multi-layered single rulebook, as well as comprising the action of
both European and national authorities. Over time, the sequence of banking supervision and resolution
decisions will necessarily increase uniformity and simplify the system. On the risks of this construction
for the single market, see Moloney (2014), pp. 1609–1670, especially at pp. 1661–1669.
The Legal History of the Banking Union
11 Conclusion: The Meaning of the Banking Union for European
With the Banking Union, the evolution of the integration of the single financial
market continues to mirror that of European integration as a whole. The Banking
Union encapsulates many of the trends forming the legal and institutional responses
to the financial and public debt crises since 2007.99
First, as mentioned before, the Banking Union leads to the replacement of soft
governance by centralised enforcement structures, namely the SSM and the SRM.
The EU economic governance was similarly reinforced with stricter enforcement
procedures in the context of the Stability and Growth Pact (SGP).
A related trend is entrusting European bodies with powers to take discretionary
decisions with broad institutional independence. This occurs in areas which were
previously close to government functions at the national level such as banking
supervision, the management of a banking crisis, and also economic governance.
While there are also legal reasons for such development, it may be argued that the
centralisation itself of enforcement powers at the supranational level requires that
they are exercised in full independence. The credibility of supranational powers is
very much reliant on the independence with which they are exercised, as confirmed
by historical evidence.100 Equally, the transfer of banking supervision and
resolution was accompanied by their insulation from both European and national
politics as a source of credibility. This, in turn, raises new challenges in ensuring
democratic accountability.101
The accountability and reporting framework of the Banking Union also follows,
in this context, the trend in wider European integration. There is an increased depth
of the role of the European Parliament and an increased involvement of national
parliaments, due to the potential impact of supervision and resolution decisions at
domestic level.102 The Council and the Eurogroup are involved as well, together
For an overview of these constitutional trends, see Chiti et al. (2012).
Harold James highlights, with historical examples, the risks of lack of credibility and political
disintegration if supranational powers are not perceived to be exercised with independence. See James
(2010), p. 15.
See the analysis of Renaud Dehousse, who also emphasises in this new stage of European integration,
rather than the rise in intergovernmentalism, the reinforcement of the role of supranational actors, like the
Commission and the ECB, in the form of new powers and strengthened autonomy. According to this
analysis, it is, however, hard to reconcile such developments with attempts at ‘politicizing’ EU public
policy. See Dehousse (2015).
The relationship between the ECB/SSM and the European Parliament is regulated in an
interinstitutional agreement, which provides the Parliament with specific instruments to request
information. See Interinstitutional Agreement between the European Parliament and the ECB on the
practical modalities of the exercise of democratic accountability and oversight over the exercise of the
tasks conferred on the ECB within the framework of the Single Supervisory Mechanism [2013] OJ L 320,
p. 2. The involvement of national parliaments also bears some similarities with economic governance
arrangements where, for example, the Treaty on Stability, Coordination and Governance in EMU
provides under Art. 13 that the European Parliament will organise with national parliaments a conference
to discuss budgetary issues.
P. G. Teixeira
with the Commission in the case of the SRB.103 This framework enables political
oversight at various levels on the basis of the information provided by the ECB/
SSM and SRB.104
Second, the Banking Union is based on provisions of the Treaty, often at its
boundaries, while it also has recourse to intergovernmental arrangements, such as the
agreement on the transfer of funds to SRF. This is, for example, comparable to the
establishment of the European Financial Stability Facility and later the European
Stability Mechanism on the basis of an intergovernmental agreement, which is also
based on Article 136 TFEU.
Third, there is an increasing differentiation of the Monetary Union within the EU,
which manifests itself in specific decision-making bodies, institutional arrangements
and legal instruments of integration, such as the Euro Summits, the Eurogroup, the ESM,
the ‘Treaty on Stability, Coordination and Governance in EMU’ (TSCG), and others.
This challenges the unity of the Union, as demonstrated by the political dynamics of
opting-in and opting-out by the Member States leading to variable geometries and
variable configurations.105 In the same way, the Banking Union reinforces this
differentiation vis-à-vis the single market and it also enables a variable geometry of
Member States with the mechanism of close cooperation. At the limit, as confirmed to
some extent by ‘Brexit’, it may contribute to a loosening of the commitment to
integration of the Member States not participating in the Monetary Union.
All in all, the Banking Union is one of the outcomes of the gradual
transformation of the EU from a community of benefits to a community of risksharing, where all Member States not only share the benefits from integration but
also start sharing the risks and potential costs. It is the result of a quid pro quo
between the transfer of competences and the mutualisation of risks at the European
level through the direct recapitalization of banks by the ESM, the financing of
resolution by the SRF, and the minimum coverage of bank deposits by EDIS.106
See Art. 20 of the SSM Regulation, and Art. 45 of the SRM Regulation. The relationship between the
ECB/SSM and the Council is regulated in a Memorandum of Understanding. See the Memorandum of
Understanding between the Council of the European Union and the ECB on the cooperation on
procedures related to the Single Supervisory Mechanism (SSM) 11 December 2013, available at http:// (accessed 1 May 2017).
The accountability framework of the Banking Union is, therefore, based on a system of ‘resistance-norms’,
according to which the provision of information by supranational bodies raises the political costs of policy
actions and contains such actions within a democratic framework. On the logic of accountability related to a
system of ‘resistance-norms’ providing soft limits to public administration, see Lindseth (2010), p. 22.
For example, 17 of the 27 Member States participate in the euro area, in the EFSF and in the ESM Treaty,
but 23 Member States have agreed the Euro Plus Pact, and 25 Member States have signed the TSCG.
In November 2015, the Commission put forward a proposal for a European Deposit Insurance
Scheme, which is under discussion at the time of writing. See European Commission, Proposal for a
Regulation of the European Parliament and of the Council amending Regulation (EU) 806/2014 in order
to establish a European Deposit Insurance Scheme, COM/2015/0586 final, 2015/0270 (COD), 24
November 2015. It was presented as one of the measures for completing the Banking Union, together with
the implementation of the BRRD, a common fiscal backstop for the Single Resolution Fund, and further
risk reduction in the banking sector, notably with the introduction of limits to banks’ exposures to
sovereigns. See European Commission, Communication from the Commission to the European
Parliament, the Council, the European Central Bank, the European Economic and Social Committee
and the Committee of the Regions ‘Towards the completion of the Banking Union’, COM/2015/0587
final, 24 November 2015.
The Legal History of the Banking Union
It therefore aims at matching European competences with European liabilities.
Developments such as the ESM, the reinforcing of the SGP, and the TSCG were
expressions of this evolution, but not with the significance of the Banking Union,
which involves a permanent and complete transfer of sovereignty of competences
previously close to the core of national sovereignty. This is a profound
transformation that presupposes, not only the strengthening of solidarity between
Member States, but also new sources of democratic legitimacy at the European and
national levels. This is one of the main challenges for the future functioning of the
Banking Union.107
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