Since 2014, the European Union (EU) had been trying to establish a single banking union based on three pillars—supervision, resolution, and depositor insurance. While EU member states had quickly agreed to a set of mechanisms on bank supervision and resolution, years later, they continued to disagree on depositor insurance. Part of the objective of the banking union was to break the doom loop—the connection between banks and their own governments. This case provides a brief overview of banking in the EU and goes into detail on the supervision and resolution mechanisms, including roles at the EU level versus at the sovereign level. It also delves into different viewpoints and several proposals on establishing depositor insurance for students to consider, including concerns of moral hazard and the possible role of safe assets.

The case is taught in “EU in the World Economy,” a second-year elective course at the University of Virginia Darden School of Business. To prepare business students for global business experience, this course explores the fundamental differences and similarities between the EU and the United States. The case is also useful for a general economics course discussing moral hazard, adverse selection, and deposit insurance or, alternatively, in a course focusing on the economics of banking.