Notwithstanding the important progress on the European Banking Union (EBU), which began in November 2014, important challenges remain for the EU banking system. Non-performing loans (NPLs) of European banks are estimated to be worth about €1000bn according to recent estimates by the International Monetary Fund, and there are serious doubts about the credibility of the bail-in mechanism for unsecured creditors within the Single Resolution Mechanism (SRM) if a large bank faces insolvency or a systemic banking crisis erupts. It may take another crisis to establish the credibility – or lack thereof – of the SRM.
Another challenge for Europe is setting up a framework for a capital markets union (CMU). Transforming European finance from a primarily bank-based financial system into a system under which more of the funding is channelled directly to firms and households through non-bank financial institutions and securities markets encourages a shadow banking system. Work towards a CMU seems even more complex and politically difficult than the building of the EBU, given the extremely diverse legislative and regulatory climate regarding non-bank finance in EU countries and the resistance of national authorities to release powers to European authorities.
