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European Banking Union: Imperfect, But It Can Work

European Banking Union (EBU) is an odd construction born of compromises and shaped to fit into legal territory bounded by EU Treaty constraints that cannot be adjusted in the current political environment. Can EBU work in spite of the limitations of its design or is there dangerous papering over the cracks? This paper addresses this question by examining the capacity of the EBU to help stabilize the euro area and to contribute to the reversal of current trends towards fragmentation and renationalization of financial markets. The paper looks closely at the design of both the Single Supervisory Mechanism and the Single Resolution Mechanism, on which the EU legislative Institutions reached agreement in April 2014. From this analysis the paper builds the case for the claim that the legal framework for the two mechanisms is sufficiently robust for the new arrangements to have the authority and credibility to rebuild confidence and, in that way, to contribute to the reversal of the trend towards EU financial market disintegration.