Dublin: A decade after it was conceived, the banking union remains a building with two strong walls and a missing roof, and supervisors are once again pressing to finish the job. In a speech on 19 May, a senior figure from the bloc’s banking supervision arm returned to the unresolved question at the project’s heart: the so-called bank-sovereign nexus, the dangerous feedback loop in which weak banks drag down their home governments and shaky public finances in turn imperil the banks that hold their debt. Breaking that loop, the argument runs, requires completing the union that was supposed to break it.
The union rests on three intended pillars. Common supervision arrived in 2014, common resolution soon after, but the third – a shared system to protect depositors across borders – has never been built. Without it, a saver’s confidence still depends partly on the strength of the state behind their particular bank, which means a euro deposited in a fragile member is not quite as safe as the same euro in a strong one. That asymmetry is exactly the fragmentation the union was meant to abolish, and it persists because the politics of mutualising risk have proved intractable.
The supervisor’s case is that the unfinished structure is not merely incomplete but actively risky. As long as the nexus survives, a banking shock in one country can still bleed into its sovereign and ricochet across the system, undoing much of the resilience that a decade of reform has bought. Completing the union – above all by adding the missing depositor-protection layer – is framed less as an idealist’s project than as a hard-headed defence against the next crisis.
There is, at least, evidence that the existing pillars are working. The banking authority’s latest assessment of the requirement that banks hold enough loss-absorbing capital and bail-inable debt – the buffers that let a failing lender be wound down without taxpayer rescue – found that institutions across the bloc have kept building those resources, accessing markets with limited disruption to their business models. The headline picture is one of a more shock-absorbent sector. The caveat is that structural challenges persist for smaller banks, which face steeper costs to raise the same instruments and a narrower investor base to sell them to.
That uneven progress underlines why the missing pillar still matters. Resolution tools and capital buffers reduce the chance that a failure spreads, but they do not fully reassure a depositor weighing whether their savings are as secure in one member as another. Only a common backstop does that, and its absence keeps a sliver of doubt alive in precisely the moments when confidence is most fragile.
Whether the political appetite now exists to close the gap is the open question. The technical case has been made repeatedly; the obstacle has always been the reluctance of stronger members to stand behind the depositors of weaker ones before legacy risks are cleaned up. The May intervention is a reminder that supervisors regard the status quo as a standing vulnerability rather than a stable compromise. Until the roof goes on, the banking union will keep doing most of its job – while leaving its founding promise half-kept.
