The EU Banking Union: Supervision, Resolution, and Depositor Protection

The EU Banking Union: Supervision, Resolution, and Depositor Protection

1. Introduction

The European Banking Union is one of the most significant institutional developments in the European Union’s financial architecture. Established in response to the global financial crisis of 2008 and the subsequent sovereign debt crisis in the euro area, it seeks to create a common framework for supervising banks, managing bank failures, and protecting depositors.

The underlying problem was structural. European banks operated across increasingly integrated financial markets, but their supervision, resolution, and deposit-protection arrangements remained largely national. When a major bank encountered difficulties, the consequences could extend beyond its home state. Financial distress could spread through cross-border banking groups, undermine confidence in other institutions, and create pressure on national public finances.

The crisis exposed the weaknesses of a system in which banks could operate internationally while the authorities responsible for dealing with their failure remained divided along national lines. The relationship between banks and their sovereign governments also became a source of instability. Governments sometimes had to support domestic financial institutions, increasing public debt and creating further pressure on national economies.

The Banking Union was designed to address these weaknesses through common European institutions and rules. Its architecture is traditionally described through three pillars:

1. The Single Supervisory Mechanism (SSM), which establishes common banking supervision under the leadership of the European Central Bank (ECB).
2. The Single Resolution Mechanism (SRM), which provides a common framework for managing failing banks through the Single Resolution Board and the Single Resolution Fund.
3. The European Deposit Insurance Scheme (EDIS), proposed as a common European system of deposit protection, but not yet established as a fully operational third pillar.

The first two pillars are operational. The third remains incomplete, although EU legislation adopted in 2026 has strengthened the harmonised framework for national deposit-guarantee schemes and the financing of bank crisis management.

The legal framework has also undergone a significant reform through the 2026 Crisis Management and Deposit Insurance (CMDI) package. This reform seeks to improve the treatment of failing small and medium-sized banks, expand the practical availability of resolution tools, and strengthen cooperation between supervisory and resolution authorities.

The Banking Union is therefore not simply a system of centralised supervision. It is a broader legal arrangement governing the lifecycle of a bank: its authorisation and ongoing supervision, the identification of financial difficulties, the management of failure, and the protection of depositors.

2. Historical Development and Legal Foundations

The Banking Union emerged from the recognition that monetary integration required a more integrated system of financial supervision and crisis management.

The financial crisis demonstrated that the failure of a bank could threaten the stability of an entire national financial system. The subsequent sovereign debt crisis revealed the close relationship between banks and national governments. Financial institutions holding substantial amounts of domestic sovereign debt could transmit public-finance instability into the banking system, while governments supporting failing banks could become more financially vulnerable themselves.

This relationship became known as the bank-sovereign nexus.

In 2012, European leaders agreed that a more integrated banking framework was necessary. The European Council and the Euro Summit supported the creation of a Single Supervisory Mechanism, allowing the ECB to assume specific prudential supervisory responsibilities.

The first major legislative step was Council Regulation (EU) No 1024/2013, which conferred specific supervisory tasks on the ECB. The Single Supervisory Mechanism became operational in November 2014.

The second major step was the establishment of the Single Resolution Mechanism through Regulation (EU) No 806/2014. The Single Resolution Board became operational in 2015, while the Single Resolution Fund was progressively developed and became fully mutualised at the end of 2023.

The Banking Union was built on the wider European Single Rulebook for financial institutions. This includes prudential requirements, capital standards, recovery and resolution rules, and deposit-guarantee legislation.

The principal legal sources include:

• Article 114 TFEU, which provides a legal basis for harmonising legislation necessary for the functioning of the internal market.
• Article 127(6) TFEU, which permits the Council to confer specific prudential supervisory tasks on the ECB.
• Regulation (EU) No 1024/2013, establishing the Single Supervisory Mechanism.
• Regulation (EU) No 468/2014, establishing the ECB’s framework for cooperation within the SSM.
• Regulation (EU) No 806/2014, establishing the Single Resolution Mechanism.
• Directive 2014/59/EU, establishing the Bank Recovery and Resolution Directive (BRRD).
• Directive 2014/49/EU, establishing the harmonised framework for deposit-guarantee schemes.

The 2026 CMDI reform amended important parts of this framework through Directive (EU) 2026/806, Regulation (EU) 2026/808, and Directive (EU) 2026/804.

These reforms are particularly relevant because they address weaknesses in the treatment of smaller and medium-sized banks, which may be systemically important in their local or regional markets even when they do not qualify as large cross-border institutions.

3. Membership and Territorial Scope of the Banking Union

The Banking Union was originally designed for the euro area, reflecting the close relationship between monetary union and financial integration.

Euro-area Member States participate in the Banking Union through the common supervisory and resolution framework. Non-euro-area EU Member States may participate by establishing close cooperation with the ECB under Article 7 of Regulation 1024/2013.

This arrangement allows a Member State whose currency is not the euro to participate in the SSM without first adopting the single currency.

As of November 2026, the Banking Union includes the 21 euro-area Member States, including Bulgaria.

Czechia, Denmark, Hungary, Poland, Romania, and Sweden remain outside the Banking Union, although the legal framework allows non-euro-area Member States to seek participation through close cooperation.

Participation has several consequences. The ECB becomes responsible for the relevant supervisory functions, the national authorities cooperate within the common framework, and the participating state becomes subject to the applicable resolution arrangements.

It is important to distinguish Banking Union membership from the broader EU Single Rulebook. EU banking legislation applies throughout the Union, including Member States outside the Banking Union. The difference concerns the institutional arrangements for supervision and resolution, rather than the existence of a separate banking law for participating states.

3.1 Bulgaria’s Participation

Bulgaria provides a useful example of the relationship between close cooperation and full participation in the Banking Union.

On 1 October 2020, Bulgaria entered into close cooperation with the ECB under the Single Supervisory Mechanism. This allowed the ECB to exercise direct supervision over significant Bulgarian banks and to oversee the supervisory work of the Bulgarian National Bank.

Following Bulgaria’s adoption of the euro on 1 January 2026, the institutional arrangement changed. Bulgaria became a full participant in the Banking Union, and the Bulgarian National Bank became fully integrated into the Eurosystem and the common supervisory framework.

The ECB’s 2025 Annual Report on supervisory activities explains the transition from close cooperation to full participation. From 1 January 2026, the ECB directly exercises its supervisory powers over Bulgarian supervised entities rather than issuing instructions to the Bulgarian National Bank under the previous close-cooperation arrangement.

The transition illustrates how euro adoption affects not only monetary policy but also the institutional position of national banking authorities.

4. The Single Supervisory Mechanism

The Single Supervisory Mechanism is the first pillar of the Banking Union.

It establishes a system in which the ECB acts as the central prudential supervisor, working together with national competent authorities.

Its principal objective is to ensure that banks remain financially sound, adequately capitalised, properly managed, and capable of meeting their obligations.

The legal foundation is Council Regulation (EU) No 1024/2013.

The SSM covers credit institutions established in participating Member States. Its supervisory framework is based on a distinction between significant and less significant institutions.

4.1 The European Central Bank as Supervisor

The ECB directly supervises significant credit institutions.

The classification depends on criteria including the size of the institution, its importance to the economy of the participating Member State or the Union, the significance of its cross-border activities, and whether it has received or requested direct public financial assistance.

The ECB may also directly supervise an institution where necessary to ensure consistent application of high supervisory standards.

Direct supervision gives the ECB substantial powers, including the authority to:

• Grant and withdraw banking authorisations.
• Assess qualifying holdings in credit institutions.
• Ensure compliance with prudential requirements.
• Review capital adequacy and liquidity.
• Assess internal governance and risk-management systems.
• Conduct supervisory reviews and on-site inspections.
• Impose supervisory measures and administrative sanctions within its legal powers.

These powers allow the ECB to identify weaknesses before they develop into serious threats to the institution or the wider financial system.

4.2 National Competent Authorities

National supervisory authorities continue to perform important functions within the SSM.

They generally supervise less significant institutions under the ECB’s oversight. They also assist the ECB in the direct supervision of significant banks, participate in joint supervisory teams, and perform functions assigned under the common framework.

The division of work is not equivalent to a complete separation between European and national supervision.

The ECB retains overall responsibility for the effective and consistent functioning of the SSM. It may issue regulations, guidelines, and general instructions to national competent authorities and may assume direct supervision of less significant institutions where necessary.

National authorities therefore remain operationally important, but they function within a common European supervisory structure.

4.3 Significant and Less Significant Institutions

The distinction between significant and less significant institutions determines the allocation of day-to-day supervisory responsibilities.

Significant institutions are supervised directly by the ECB. Less significant institutions are generally supervised by national authorities under the ECB’s oversight.

The classification does not mean that less significant banks are exempt from European prudential requirements. Both categories must comply with the applicable Single Rulebook, including capital, liquidity, governance, reporting, and risk-management rules.

The distinction is primarily institutional and supervisory.

A smaller bank may still be important to a particular region or local economy. The supervisory framework therefore allows the ECB to intervene where consistent standards or financial stability require it.

4.4 Supervisory Review and Early Intervention

Supervision is not limited to checking whether a bank complies with formal capital ratios.

Authorities assess the institution’s business model, governance arrangements, internal controls, credit-risk exposure, liquidity position, operational resilience, and ability to withstand economic stress.

Where weaknesses are identified, supervisors may require corrective measures.

These may include increasing capital, strengthening liquidity, changing risk-management practices, improving governance, limiting certain activities, or requiring the institution to prepare measures to restore its financial position.

Early intervention is particularly important because a bank may still be operating while its financial position deteriorates.

The objective is to address weaknesses before the institution becomes failing or likely to fail and before resolution or insolvency becomes necessary.

The 2026 CMDI reform further clarifies the legal framework governing early intervention and the relationship between supervisory action and resolution planning.

5. The Single Resolution Mechanism

The second pillar of the Banking Union is the Single Resolution Mechanism.

Supervision aims to prevent bank failure where possible. Resolution provides a framework for managing a bank when prevention is no longer sufficient.

A bank may fail because of severe losses, inadequate capital, liquidity problems, misconduct, poor management, or a combination of these factors.

Ordinary insolvency proceedings may be insufficient where the institution performs functions essential to the economy or where its immediate liquidation could create serious financial instability.

The SRM seeks to ensure that failing banks can be restructured or closed in an orderly manner, with minimum disruption to financial markets and the real economy.

Its legal foundation is Regulation (EU) No 806/2014.

The two principal components are:

• The Single Resolution Board (SRB).
• The Single Resolution Fund (SRF).

The SRB operates as the central resolution authority, working with national resolution authorities in participating Member States.

6. The Single Resolution Board

The Single Resolution Board is an independent EU agency established by Regulation 806/2014.

It is responsible for resolution planning and decision-making for significant institutions and cross-border banking groups within the Banking Union. It also has responsibilities for other institutions where resolution requires the use of the Single Resolution Fund or where the Regulation otherwise gives it authority.

Its functions include:

• Preparing and reviewing resolution plans.
• Assessing whether banks are resolvable.
• Identifying obstacles to effective resolution.
• Determining resolution strategies.
• Adopting resolution schemes where the legal conditions are satisfied.
• Deciding on the use of the Single Resolution Fund.
• Coordinating the implementation of resolution measures with national authorities.

The SRB works closely with the ECB, the European Commission, the Council, and national resolution authorities.

6.1 Resolution Planning

Resolution planning is intended to ensure that a bank can be dealt with effectively if it fails.

Banks and resolution authorities must consider how critical functions could be maintained, how losses would be absorbed, how essential services would continue, and how the institution could be restructured or wound down.

A resolution plan may identify the preferred resolution strategy, the entities within a banking group that would be subject to resolution, and the financial resources available to implement the strategy.

The objective is to avoid improvisation during a crisis.

A bank that cannot be resolved effectively may create significant risks for the financial system. Resolution authorities may therefore require changes to its organisational or financial structure to remove obstacles to resolvability.

6.2 National Resolution Authorities

National resolution authorities remain essential to the operation of the SRM.

They prepare and implement resolution plans for institutions within their responsibilities, cooperate with the SRB, and carry out decisions adopted at European level.

They may also implement resolution actions directly under the applicable framework.

The SRB retains central responsibilities and may exercise its powers where necessary to ensure consistent application of the Regulation.

This system combines European decision-making with national operational capacity.

7. When Is a Bank Placed into Resolution?

Resolution is not automatic whenever a bank experiences financial difficulties.

The legal framework requires the relevant conditions to be satisfied.

Under the traditional three-part test in Article 18 of Regulation 806/2014, a resolution action may be taken where:

1. The bank is failing or likely to fail.
2. There is no reasonable prospect that alternative private-sector measures or supervisory action would prevent its failure within a reasonable timeframe.
3. Resolution is necessary in the public interest.

These conditions distinguish resolution from ordinary insolvency.

7.1 Failing or Likely to Fail

A bank may be considered failing or likely to fail where it no longer satisfies, or is likely in the near future to cease satisfying, the conditions for authorisation.

Other circumstances may include a balance sheet in which liabilities exceed assets, an inability to pay debts as they fall due, or a need for extraordinary public financial support, subject to the exceptions established by law.

The assessment is based on the bank’s financial position and the relevant supervisory evidence.

The ECB, acting as the competent supervisor, normally makes the failing-or-likely-to-fail assessment. The SRB may also act under the conditions provided by the Regulation.

7.2 No Reasonable Alternative

Resolution should not be used where a realistic private-sector or supervisory solution can prevent the bank’s failure.

Possible alternatives include a private acquisition, a capital increase, a restructuring agreement, or other measures capable of restoring the institution’s viability.

The authorities must consider whether such alternatives are realistic and can be implemented within an appropriate period.

7.3 Public Interest

The public-interest assessment is central to the distinction between resolution and liquidation.

Resolution may be necessary where it is required to achieve one or more statutory objectives that could not be achieved to the same extent through ordinary insolvency proceedings.

These objectives include:

• Maintaining the continuity of critical functions.
• Avoiding significant adverse effects on financial stability.
• Protecting public funds by minimising reliance on extraordinary public financial support.
• Protecting covered depositors and investors.
• Protecting client funds and assets.

If resolution is not considered necessary in the public interest, the bank will ordinarily be wound up under the applicable national insolvency framework.

The public-interest test therefore does not mean that every failing bank must be rescued. It determines whether the special European resolution framework is justified.

8. Resolution Tools

Where the legal conditions are satisfied, the resolution authority may use one or more statutory resolution tools.

The principal tools under the SRM framework are:

8.1 Sale of Business Tool

The sale of business tool allows the resolution authority to transfer shares, assets, rights, or liabilities of the failing institution to a purchaser without requiring the consent of its shareholders or other affected parties, subject to the statutory safeguards.

The purpose is to preserve viable parts of the institution and maintain essential banking services.

For example, a failing bank may be transferred to a stronger institution that can continue operating its branches, customer accounts, and payment services.

The transfer may take place without the full liquidation of the original institution.

8.2 Bridge Institution Tool

A bridge institution is a temporary entity established or used to receive selected assets, rights, and liabilities of a failing bank.

The purpose is to preserve critical functions while the authorities determine a longer-term solution.

A bridge institution may later be sold to a private purchaser or otherwise restructured in accordance with the applicable framework.

The tool is particularly useful where an immediate sale to a private purchaser is not possible but the bank’s essential functions must continue.

8.3 Asset Separation Tool

The asset separation tool allows assets, rights, or liabilities to be transferred to an asset management vehicle.

It may be used in conjunction with other resolution tools, subject to the applicable legal conditions.

Its purpose is to separate impaired or difficult-to-value assets from the institution or bridge institution, allowing the remaining business to operate more effectively.

The tool is not intended to be used independently as a general mechanism for transferring losses to a public asset management vehicle.

8.4 Bail-In Tool

Bail-in is one of the most important innovations in modern bank resolution.

It allows the resolution authority to write down eligible liabilities or convert them into equity, thereby allocating losses to shareholders and creditors rather than relying automatically on public funds.

The principle is that those who invested in or financed the bank should bear losses according to their legal position and the statutory hierarchy.

Bail-in may be used to recapitalise the institution or to support a bridge institution or another resolution strategy.

Certain liabilities are excluded from bail-in, including covered deposits, secured liabilities to the extent of the secured portion, and other categories specified by law.

The hierarchy of loss absorption is central to the legality of the process. The authority must respect the statutory order of claims and the principle that no creditor should incur greater losses than it would have incurred under ordinary insolvency proceedings.

9. Bail-In and the Hierarchy of Losses

The bail-in framework is intended to reduce the likelihood that bank failures will be financed through public funds.

The general sequence of loss absorption is:

1. Shareholders bear losses first.
2. Holders of capital instruments and subordinated claims bear losses according to their position in the hierarchy.
3. Other eligible creditors may bear losses where necessary.
4. Eligible deposits may be affected only in accordance with the statutory hierarchy and applicable exclusions.

Covered deposits up to €100,000 are excluded from bail-in.

The principle is not that every creditor must bear losses in every resolution. The authority must apply the statutory hierarchy and respect the legal protections attached to particular claims.

9.1 The No Creditor Worse Off Principle

A central safeguard is the principle that no creditor should incur greater losses through resolution than it would have incurred if the bank had instead been wound up under normal insolvency proceedings.

This is known as the No Creditor Worse Off (NCWO) principle.

An independent valuation is used to compare the treatment of creditors under resolution with the hypothetical treatment they would have received in liquidation.

If a creditor suffers a greater loss through resolution, the legal framework provides for compensation under the applicable conditions.

The principle protects property interests and supports confidence in the fairness of resolution proceedings.

9.2 Minimum Requirements for Own Funds and Eligible Liabilities

The Minimum Requirement for Own Funds and Eligible Liabilities (MREL) requires institutions to maintain sufficient capital and eligible liabilities that can absorb losses and support recapitalisation in resolution.

MREL is determined by resolution authorities in accordance with the applicable legislation.

It is designed to ensure that a bank has a sufficient internal capacity to absorb losses without depending automatically on public resources.

The requirement is particularly important for large and complex banking groups, where the failure of one entity may affect several subsidiaries and critical financial services.

The 2026 reform also adjusts parts of the resolution framework, including requirements and funding arrangements, to improve the treatment of institutions whose preferred strategy involves a sale of business or transfer to a bridge institution.

10. The Single Resolution Fund

The Single Resolution Fund is a common financial resource intended to support resolution actions within the Banking Union.

It is financed by contributions from banks and other covered institutions rather than by ordinary taxpayer funding.

The Fund was created to provide a common source of financing where resolution tools require financial support after the institution’s own shareholders and creditors have absorbed losses in accordance with the applicable rules.

Its target level was set at at least 1% of covered deposits of all credit institutions in participating Member States.

The Fund became fully mutualised at the end of 2023, meaning that its resources are available under the common framework rather than being divided into national compartments.

10.1 When Can the Fund Be Used?

The Single Resolution Fund is not intended to protect shareholders or creditors from ordinary investment losses.

Its use is subject to strict legal conditions.

Under the traditional framework, a minimum contribution of 8% of the total liabilities, including own funds, of the institution must generally have been made by shareholders and creditors before the Fund can contribute to resolution financing.

The Fund’s contribution is also ordinarily limited to 5% of the institution’s total liabilities, including own funds, subject to the relevant statutory provisions and exceptional arrangements.

The 2026 CMDI reform adjusts aspects of the funding framework and seeks to make industry-funded resources more practically available for the resolution of a broader range of institutions.

The objective is to avoid situations in which a bank is too important to be allowed to fail but too small to qualify easily for the existing resolution framework.

10.2 Industry-Funded Resources

The Fund is financed through contributions from participating banks.

Contributions take account of relevant factors, including the size and risk profile of the institution.

This creates an important legal and economic distinction between a common resolution fund and a government bailout mechanism.

The Fund is designed to provide financial support for orderly resolution after the applicable loss-absorption conditions have been satisfied.

It does not represent an unlimited guarantee that every failing bank will receive financial assistance.

11. Deposit Protection in the European Union

The protection of bank deposits is essential to public confidence in the financial system.

Depositors generally expect to be able to access their money even if the bank holding their account becomes insolvent.

Without a credible guarantee, rumours about a bank’s financial position could trigger large-scale withdrawals. Such withdrawals may create or accelerate liquidity problems and contribute to wider financial instability.

The EU deposit-guarantee framework seeks to prevent this outcome by requiring Member States to establish national deposit-guarantee schemes.

The principal legal instrument was Directive 2014/49/EU, known as the Deposit Guarantee Schemes Directive (DGSD).

The framework has been updated through Directive (EU) 2026/804, adopted on 30 March 2026 and published in the Official Journal on 20 April 2026.

11.1 The €100,000 Protection Limit

The standard EU protection limit is €100,000 per depositor per credit institution.

This means that an eligible depositor is protected up to €100,000 in total for covered deposits held with the same bank, rather than receiving a separate €100,000 guarantee for each account.

For example, if a customer holds €45,000 in a current account and €70,000 in a savings account at the same bank, the total deposit is €115,000. The standard guarantee protects €100,000, leaving the remaining €15,000 outside the ordinary coverage limit.

If the customer holds eligible deposits at two separate credit institutions, the protection limit generally applies separately to each institution.

The rules also provide for certain temporary high balances to receive additional protection in specified circumstances, subject to the conditions and time limits established by the applicable national and EU legislation.

11.2 Which Deposits Are Covered?

The framework generally covers eligible deposits held by individuals and businesses.

Covered deposits may include:

• Current accounts.
• Savings accounts.
• Term deposits.
• Other eligible balances held with a credit institution.

The legislation excludes or treats differently certain categories of deposits, including deposits held by financial institutions, public authorities, and certain other entities specified by law.

The legal classification of a deposit matters. Not every financial claim against a bank qualifies as a protected deposit.

For example, shares, bonds issued by a bank, and investment products are not transformed into guaranteed deposits merely because they are purchased or held through a bank.

11.3 Who Funds Deposit-Guarantee Schemes?

National deposit-guarantee schemes are funded primarily by contributions from banks.

The principle is that the banking sector should finance the protection system rather than transferring the ordinary costs of bank failure directly to taxpayers.

Contributions are calculated according to the applicable rules, taking account of covered deposits and risk-related factors.

The scheme must maintain sufficient financial resources to meet its obligations and must be capable of paying compensation within the prescribed period.

The framework also provides for cooperation and funding arrangements where the failure of a bank affects depositors in more than one Member State.

11.4 Reimbursement of Depositors

When deposits become unavailable because a credit institution has failed, the relevant deposit-guarantee scheme must reimburse eligible depositors under the applicable legal procedure.

The standard EU framework requires reimbursement within seven working days, subject to the statutory rules and limited exceptions.

The purpose is to ensure that depositors do not remain without access to protected savings for an extended period.

The reimbursement obligation is separate from the resolution of the bank itself. A bank may enter ordinary insolvency proceedings, while the deposit-guarantee scheme pays eligible depositors up to the applicable limit.

12. The European Deposit Insurance Scheme: The Unfinished Third Pillar

The European Deposit Insurance Scheme (EDIS) was proposed by the European Commission in November 2015.

Its objective is to establish a common European deposit-insurance framework for participating Banking Union states.

The proposal was intended to complement national deposit-guarantee schemes and reduce the vulnerability of individual national systems to severe local banking crises.

Under the existing arrangement, deposit protection is harmonised at EU level, but the financial responsibility for paying depositors remains primarily national.

This can create an imbalance. A banking crisis concentrated in one Member State may place considerable pressure on that country’s deposit-guarantee scheme, even though the affected banking system forms part of a wider European financial market.

EDIS would seek to reduce this fragmentation by progressively introducing a common system of financial support.

The proposed model envisaged a phased approach, with the European scheme gradually assuming a greater role in protecting covered deposits and supporting national schemes.

However, as of November 2026, EDIS has not been established as a fully operational common European deposit-insurance system.

The 2026 CMDI reforms strengthen national deposit-guarantee arrangements and harmonise certain rules concerning the use of scheme funds, but they do not replace the proposed EDIS with a completed common insurance system.

This distinction is essential. The €100,000 deposit guarantee exists throughout the EU, but it is not yet financed through a single European deposit-insurance fund.

12.1 Why Is EDIS Important?

A common deposit-insurance system could reduce the relationship between the financial strength of a national deposit-guarantee scheme and the financial position of the state in which a bank operates.

It could also strengthen depositor confidence by making the financial backing of protection less dependent on national economic circumstances.

However, the proposal raises important questions concerning risk-sharing, moral hazard, the supervision of banks, and the distribution of financial responsibilities.

States with stronger banking systems may be reluctant to share risks arising from institutions in jurisdictions where supervisory or insolvency practices have historically been weaker.

The debate therefore concerns not only financial resources but also the constitutional and economic conditions under which responsibility for banking risks should be shared.

13. The 2026 Crisis Management and Deposit Insurance Reform

The CMDI reform represents a significant development in the Banking Union’s legal framework.

The reform was designed to address weaknesses in the treatment of failing small and medium-sized banks and to make resolution tools more effective.

The legislative package consists principally of:

• Directive (EU) 2026/806, amending the Bank Recovery and Resolution Directive.
• Regulation (EU) 2026/808, amending the Single Resolution Mechanism Regulation.
• Directive (EU) 2026/804, amending the Deposit Guarantee Schemes Directive.

The package entered into force in May 2026, although the different provisions have separate application and transposition dates. Some provisions apply from June 2026, while important amendments requiring national transposition are scheduled to apply from May 2028.

It is therefore important not to treat every element of the reform as already fully operational in November 2026.

13.1 Improving the Treatment of Smaller and Medium-Sized Banks

Under the previous framework, some smaller and medium-sized institutions were more likely to be dealt with through national insolvency procedures rather than the common resolution system.

This could produce divergent outcomes across Member States.

A bank that performed important regional functions might be liquidated under national law even where a more coordinated resolution strategy could better preserve essential banking services.

The CMDI reform seeks to make the resolution framework more effective for a wider range of institutions, subject to the public-interest test and other statutory conditions.

13.2 Greater Use of Industry-Funded Safety Nets

The reform also seeks to improve the availability of funding for resolution.

Deposit-guarantee schemes may play a more flexible role in the financing of certain resolution actions, subject to legal conditions and the least-cost test.

The least-cost principle is designed to prevent a deposit-guarantee scheme from contributing more to a resolution than it would reasonably have incurred in reimbursing covered depositors under the relevant insolvency scenario.

This approach seeks to bridge funding gaps while maintaining safeguards against excessive use of common or industry-funded resources.

13.3 Stronger Cooperation Between Authorities

The reform clarifies aspects of the relationship between supervisors and resolution authorities.

Early intervention, the assessment that a bank is failing or likely to fail, and the preparation of resolution measures require close cooperation between the ECB, the SRB, and national authorities.

The objective is to reduce uncertainty and avoid delays during a crisis.

A bank’s transition from ongoing supervision to resolution should follow a predictable legal process rather than depend on improvised institutional coordination.

13.4 Implementation Remains Important

The reform’s effectiveness will depend on the quality of national transposition, supervisory practices, resolution planning, and cooperation between authorities.

The adoption of new legislation does not automatically remove the structural differences between national insolvency systems or guarantee that every bank failure can be managed without public financial consequences.

The 2026 package is an important step towards a more integrated framework, but it does not complete every aspect of the Banking Union.

14. The Relationship Between Supervision, Resolution, and Deposit Protection

The three principal components of the Banking Union perform different but complementary functions.

Supervision aims to prevent failure. Resolution addresses the orderly management of a bank that can no longer remain viable. Deposit-guarantee schemes protect eligible depositors when their deposits become unavailable.

These functions are interconnected.

A bank under supervision may show signs of financial weakness. The ECB or national supervisor may require corrective measures, additional capital, or changes in management and risk controls.

If the institution continues to deteriorate, the authorities may assess whether it is failing or likely to fail.

The resolution authority then considers whether a private-sector solution is available and whether resolution is necessary in the public interest.

If the conditions are met, a resolution scheme may be adopted. The authority may use a sale of business, bridge institution, asset separation, or bail-in tool.

If resolution is not in the public interest, the bank may instead be wound up under national insolvency law. The relevant deposit-guarantee scheme then reimburses eligible depositors whose deposits have become unavailable.

The legal sequence is not entirely mechanical. Supervisory and resolution authorities must assess the circumstances of each case, and certain functions may overlap during a crisis.

Nevertheless, the institutional division provides a coherent framework for addressing different stages of financial distress.

15. Depositor Protection and the Position of Creditors

Deposit protection must be distinguished from the protection of investors and other creditors.

A bank’s failure may affect several categories of persons:

• Retail depositors.
• Business depositors.
• Shareholders.
• Bondholders.
• Institutional creditors.
• Holders of subordinated debt.
• Secured creditors.
• Other contractual counterparties.

These groups do not enjoy identical legal protection.

Covered deposits are protected up to the applicable guarantee limit and excluded from bail-in under the resolution framework.

Deposits above the covered limit may be treated differently, depending on the legal classification of the depositor, the applicable insolvency hierarchy, and the resolution strategy.

Certain eligible deposits may receive preferential treatment under the statutory creditor hierarchy, but they are not necessarily protected against every possible loss.

Shareholders and subordinated creditors generally bear losses before more senior creditors.

The distinction is important because the Banking Union is not designed to guarantee the value of every financial claim against a bank. It seeks to protect specified interests, preserve financial stability, and allocate losses according to the legal hierarchy.

16. Judicial Review and Legal Safeguards

The Banking Union exercises substantial public authority over financial institutions. Its supervisory and resolution decisions may affect property rights, contractual obligations, corporate control, and the financial position of shareholders and creditors.

The exercise of these powers is therefore subject to legal safeguards.

16.1 Supervisory Decisions

ECB supervisory decisions must comply with the applicable legislation, procedural requirements, and principles of EU law.

Banks may challenge certain decisions through the ECB’s Administrative Board of Review, where the relevant legal conditions are satisfied.

Judicial review before the EU courts is also available under the Treaties.

16.2 Resolution Decisions

The SRB’s decisions are subject to judicial review.

The Single Resolution Board’s legal acts may be challenged under Article 263 TFEU where the requirements for standing and admissibility are satisfied.

The resolution framework also provides for review of certain decisions concerning compensation and financial assessments.

16.3 Property Rights and Proportionality

Resolution measures may interfere with shareholders’ and creditors’ property interests.

Such interference must have a legal basis and pursue a legitimate objective. It must also respect the applicable safeguards, including the hierarchy of claims, valuation requirements, and the No Creditor Worse Off principle.

The Charter of Fundamental Rights of the European Union is relevant where EU institutions or national authorities act within the scope of EU law.

Article 17 protects the right to property, while Article 47 guarantees the right to an effective remedy and a fair hearing.

The Banking Union therefore combines strong supervisory and resolution powers with procedural and substantive legal protection.

17. The Banking Union and Financial Stability

The Banking Union is intended to strengthen financial stability by reducing the fragmentation of national banking supervision and crisis management.

Its benefits include more consistent supervisory standards, coordinated responses to financial distress, improved resolution planning, and a common framework for protecting depositors.

It also seeks to reduce the dependence of banks on the financial strength of their home governments.

However, it does not eliminate every source of financial risk.

Banks remain exposed to credit risk, market volatility, liquidity pressures, operational failures, cyber threats, and changes in economic conditions.

The Banking Union also operates alongside national insolvency law, EU-wide prudential regulation, macroprudential supervision, and the wider financial stability framework.

The effectiveness of the system depends on cooperation among the ECB, the SRB, national authorities, the European Commission, and other institutions.

18. Practical Legal Examples

Example 1: A significant bank experiences severe financial losses

A major bank in a euro-area Member State suffers substantial losses and its capital position deteriorates.

The ECB, acting as supervisor, assesses the bank’s financial position and may require corrective measures. If the institution becomes failing or likely to fail and the legal conditions for resolution are satisfied, the SRB may consider a resolution scheme.

The objective is to preserve critical functions and allocate losses according to the statutory hierarchy.

Example 2: A small regional bank becomes insolvent

A small bank has no significant cross-border activities and does not qualify as significant under the SSM.

It is generally supervised by the national competent authority under the ECB’s oversight. If it fails, the relevant national resolution authority and insolvency framework may become central, unless the SRB’s powers are engaged under the applicable Regulation.

Eligible depositors remain protected by the national deposit-guarantee scheme up to the statutory limit.

Example 3: A customer holds €130,000 in one bank

A depositor holds €130,000 in eligible deposits with a single credit institution.

The standard EU deposit-guarantee protection is €100,000. The remaining €30,000 is not covered by the ordinary guarantee and may be subject to the relevant insolvency or resolution treatment.

Any additional protection for temporary high balances depends on whether the statutory conditions are satisfied.

Example 4: A bank is transferred to a bridge institution

A failing bank performs essential payment and deposit services, but no immediate private purchaser is available.

The resolution authority may transfer selected assets and liabilities to a bridge institution so that essential services continue while a longer-term solution is arranged.

Example 5: A creditor challenges a resolution outcome

A creditor argues that the resolution of a bank caused greater losses than ordinary insolvency would have caused.

The creditor may benefit from the No Creditor Worse Off safeguard. An independent valuation determines whether compensation is due under the applicable legal framework.

Example 6: A Bulgarian bank enters financial distress

A Bulgarian credit institution is subject to the Banking Union’s supervisory and resolution framework following Bulgaria’s full participation from 1 January 2026.

The ECB performs the relevant supervisory functions, while the SRB and Bulgarian resolution authorities cooperate under the Single Resolution Mechanism. Depositor protection continues through the applicable national deposit-guarantee arrangements within the harmonised EU framework.

19. Key Takeaways

• The Banking Union was established in response to the global financial crisis and the euro-area sovereign debt crisis.
• Its purpose is to create a common framework for banking supervision, resolution, and depositor protection.
• The Single Supervisory Mechanism is led by the ECB and involves national competent authorities.
• The ECB directly supervises significant banks, while national authorities generally supervise less significant institutions under ECB oversight.
• The Single Resolution Mechanism is built around the Single Resolution Board and the Single Resolution Fund.
• Resolution is available only when the statutory conditions are satisfied, including the public-interest test.
• Resolution tools include sale of business, bridge institution, asset separation, and bail-in.
• Bail-in allocates losses to shareholders and eligible creditors according to the statutory hierarchy.
• The No Creditor Worse Off principle protects creditors against receiving less than they would have received in ordinary insolvency.
• The Single Resolution Fund is financed by the banking sector and is subject to strict conditions governing its use.
• EU deposit-guarantee rules provide standard protection of up to €100,000 per depositor per credit institution.
• The European Deposit Insurance Scheme remains an uncompleted proposal as of November 2026.
• The 2026 CMDI reform strengthens the legal framework for early intervention, resolution, and deposit-guarantee funding.
• Bulgaria became a full participant in the Banking Union on 1 January 2026 following euro adoption.
• Supervisory and resolution decisions remain subject to legal safeguards and judicial review.

20. Frequently Asked Questions

1. What is the European Banking Union?

The Banking Union is a framework for common banking supervision and resolution, together with harmonised depositor-protection rules. It aims to strengthen financial stability and reduce the fragmentation of national banking systems.

2. What are the three pillars of the Banking Union?

They are the Single Supervisory Mechanism, the Single Resolution Mechanism, and the proposed European Deposit Insurance Scheme. The first two are operational. EDIS has not yet been established as a fully operational common European deposit-insurance system.

3. Who supervises banks in the Banking Union?

The ECB directly supervises significant banks and oversees the supervisory framework. National competent authorities generally supervise less significant institutions and cooperate with the ECB.

4. What is the difference between supervision and resolution?

Supervision monitors banks and seeks to prevent financial difficulties. Resolution applies when a bank is failing or likely to fail and an orderly intervention is necessary in the public interest.

5. What is bail-in?

Bail-in is a resolution tool through which eligible liabilities may be written down or converted into equity to absorb losses or recapitalise a bank. It is intended to make shareholders and creditors bear losses before public financial resources are used.

6. Are all bank deposits protected up to €100,000?

The standard EU protection applies to eligible deposits up to €100,000 per depositor per credit institution. Certain deposits and categories of depositors are excluded, and additional protection may apply to qualifying temporary high balances.

7. Is the Single Resolution Fund financed by taxpayers?

The Fund is financed primarily by contributions from banks. Its use is subject to strict statutory conditions and is not an automatic public guarantee of bank liabilities.

8. Does the EU have a common deposit-insurance fund?

No. The European Deposit Insurance Scheme remains a proposal. Deposit protection currently relies principally on national deposit-guarantee schemes operating under harmonised EU rules.

9. What happens to depositors when a bank fails?

Eligible depositors are protected up to the applicable guarantee limit. Depending on the circumstances, the bank may enter resolution or ordinary insolvency proceedings, and the deposit-guarantee scheme may reimburse covered deposits.

10. Does the Banking Union apply to every EU Member State?

The framework applies to euro-area Member States. Non-euro-area EU states may participate through close cooperation with the ECB. Other EU banking legislation, including the Single Rulebook, applies more broadly across the Union.

11. Is Bulgaria part of the Banking Union?

Yes. Bulgaria entered into close cooperation with the ECB in October 2020 and became a full participant in the Banking Union on 1 January 2026, when it adopted the euro.

12. What changed under the 2026 CMDI reform?

The reform strengthens the rules governing early intervention, resolution conditions, resolution funding, and deposit-guarantee schemes. It seeks to make resolution more effective for a wider range of banks and improve cooperation between European and national authorities. Some provisions apply from 2026, while others require national transposition by 2028.

21. Conclusion

The European Banking Union represents a major step in the development of a more integrated European financial system. It recognises that banks operating across national borders cannot be supervised and resolved effectively through isolated national arrangements alone.

The Single Supervisory Mechanism provides a common supervisory structure under the leadership of the ECB. The Single Resolution Mechanism establishes a coordinated framework for dealing with failing institutions, allocating losses, and preserving critical banking functions. Deposit-guarantee legislation protects eligible depositors and supports public confidence in the banking system.

The legal architecture is based on a carefully defined division of institutional responsibilities. The ECB supervises banks within the SSM, the Single Resolution Board coordinates resolution within its mandate, national authorities perform essential operational functions, and national deposit-guarantee schemes provide the established depositor-protection mechanism.

The 2026 CMDI reform strengthens this framework by addressing weaknesses in the treatment of smaller and medium-sized banks and improving the availability of industry-funded resolution resources. Nevertheless, the absence of a fully operational European Deposit Insurance Scheme remains a significant gap in the Banking Union’s institutional design.

The central constitutional challenge is how to combine common supervision and resolution with a sufficiently integrated system of financial responsibility. The Banking Union has made substantial progress in centralising the management of banking risks, but its ultimate effectiveness depends on whether the remaining differences in national insolvency systems, financial resources, and deposit-protection arrangements can be addressed.

It is therefore best understood as an evolving legal framework rather than a completed institutional project. Its development will remain closely connected to the future of Economic and Monetary Union and the broader question of how much financial risk and responsibility the Member States are prepared to share.

22. Primary Legal Sources and Further Reading

Treaty provisions

• Article 114 TFEU – Approximation of laws for the internal market
• Article 127(6) TFEU – Prudential supervisory tasks conferred on the ECB

Core EU legislation

• Council Regulation (EU) No 1024/2013 – Single Supervisory Mechanism
• Regulation (EU) No 468/2014 – SSM Framework Regulation
• Regulation (EU) No 806/2014 – Single Resolution Mechanism
• Directive 2014/59/EU – Bank Recovery and Resolution Directive
• Directive 2014/49/EU – Deposit Guarantee Schemes Directive

2026 CMDI reform

• Directive (EU) 2026/806 – Amendments to the Bank Recovery and Resolution Directive
• Regulation (EU) 2026/808 – Amendments to the Single Resolution Mechanism Regulation
• Directive (EU) 2026/804 – Amendments to the Deposit Guarantee Schemes Directive

Institutional resources

• European Commission – Banking Union
• European Commission – Single Supervisory Mechanism
• European Commission – Single Resolution Mechanism
• European Commission – European Deposit Insurance Scheme
• European Commission – Deposit Guarantee Schemes
• European Central Bank – Banking Supervision
• Single Resolution Board
• Council of the European Union – Banking Union