Banks in, states out: banking union and new member states

This paper reviews political responses of the new EU member states to the evolving proposals for the banking union. Since, nearly all banks in these countries are foreign-owned - primarily by parent banks from the euro zone countries - their home-country supervisor would be the European Central Bank, while the domestic authorities would remain relegated to the host-country supervisory role. However, the single market rules allow parent banks to convert their subsidiaries into branches, thus shifting them entirely under the euro zone supervision and out of supervisory reach of domestic authorities. Although this option always existed the banking union and especially the proposed single deposit insurance scheme, tilts incentives of bank owners towards transform subsidiaries to branches. Hence, the authorities in the non-euro new member states face the possibility that their banks become de facto part of the euro zone, while some new member states remain outside of single currency. Such countries may find out that retaining some control over their banking sector requires euro zone entry.