A Copernican Turn for Banking Union. CEPS Policy Brief No. 290, 14 May 2013

Despite apparent consensus that the creation of a ‘Banking Union’ is essential for the survival of the euro, progress is painfully slow. The Single Supervisory Mechanism may not be ready before the middle of next year, the Single Resolution Mechanism may require a laborious change of the EU Treaty and common deposit insurance has been postponed into the indefinite future. Any real progress has been prevented by the protracted fights over which government will be the payer of last resort when banks fail because of past bad loans. In this Policy Brief, Thomas Mayer suggests that a radically new approach is needed if there is any prospect of moving beyond this impasse to reach full Banking Union. Instead of trying to move from common bank supervision over to resolution and then on to deposit insurance, he argues that policy-makers should go backwards and start with deposit insurance, move from there to resolution, and end with supervision.