European Reforms

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Vinay Yadav, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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In January the new European mechanism to resolve failing banks went live. The Single Resolution Mechanism’s (SRM) goal is to resolve failing banks at the lowest cost to taxpayers. It includes the participation of the private sector, such as unsecured depositors or junior creditors, according to the bail-in rules under the Bank Recovery and Resolution Directive.

Additionally, SRM-covered banks need to provide $59 billion in funding over the next eight years to create the Single Resolution Fund. While this means higher costs for banks, it reduces the need for taxpayers to bail out banks. The final step to completing the banking union is a common deposit guarantee scheme similar to the US’ Federal Deposit Insurance Corporation.

In 2016, a European Commission proposal to establish a European Deposit Insurance Scheme will be hotly debated. The aim is to guarantee individual deposits up to $108,000 at all banks in the euro area — benefiting around 340 million citizens in 19 countries. When this is implemented, both sides of the Atlantic Ocean share a similar approach to supervision, stress testing, resolution and deposit guarantees.

Europe also launched another big project last year: the capital markets union (CMU). The CMU’s goal is to create deeper and more integrated capital markets. Traditionally, Europe has been dominated by bank financing.

Source: “Europe’s Financial Reforms: What are the Next Big Changes?”

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