Banking Union and the Risk-Control Nexus: A Guiding Star

• Author: Peter Murphy
• Position: Final Year BCL (Law and Business), University College Cork
• Pages: 35-46

(2022) 21 COLR 35

35

BANKING UNION AND THE RISK-CONTROL NEXUS: A GUIDING STAR

Peter Murphy*

A INTRODUCTION

A rising tide may lift all boats, but, as the European Union (EU) discovered in painful fashion,

it may also conceal submerged hazards. A long period of European growth and integration was

thrown into reverse in the late 2000s as the Union was buffeted first by the Global Financial

Crisis and later by the Eurozone Sovereign Debt Crisis. As the tide drained out, the instability

of Europe’s financial infrastructure was revealed: a system sufficiently integrated so as to allow

the spread of contagion, yet not so integrated as to allow for the effective diversification of

risk.

The EU is no stranger to catastrophe. The history of its construction is a story of crisis and

repair, as befits a polity born from the ashes of post-war Europe. On this occasion, Europe’s

response was to call for the integration of the bloc’s financial sector into ‘a genuine economic

and monetary union’: a Banking Union.

1

Risk was to be diversified across borders, ‘[putting]

an end to the era of massive bailouts paid by taxpayers and [helping to] restore financial

stability’.

2

The nexus between bank and state would be shattered; no bank would be too big to

fail. A stronger, more resilient European banking industry would emerge from the devastation

of the crisis, capable of financing its own resolutions and providing the real economy with

adequate credit without destabilising it.

This article submits that effective application of the new resolution procedures and the

introduction of a common deposit insurance scheme – the incomplete elements of Banking

Union – can only be achieved by recalibrating the project to take account of the risk-control

nexus: risk must be spread equally between the economies of all Member States in return for

the centralisation of control at European level. Whether by accident or design, this principle

was at the heart of early successes, just as it was absent during reverses and stagnation.

* Final Year BCL (Law and Business), University College Cork. With thanks to the friends I have made in the

School of Law, who have made these last four years the most enjoyable of my life.

1

Herman Van Rompuy, (European Council, 2012) EUCO 120/12, 4

<https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131201.pdf> accessed 24 March 2022.

2

European Commission, ‘Updated Version of First Memo Published on 15/04/2014 – Banking Union: Restoring

Financial Stability in the Eurozone’ (2015) MEMO 14/294.