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CNBC Explains: This is the safety net that's meant to save Europe's banks

It's a good job Europe has had a lot of practice in dealing with the parlous state of its banks.

The region's economic and financial crises of 2010-2013 saw several of the region's banks brought to the brink as toxic property loans and nearly-worthless sovereign bonds combined with massive economic shocks to eat into lenders' balance sheets.

Spanish banks were particularly badly hit, having to be bailed out to the tune of 41 billion euros ($45 billion) by the European Union, International Monetary Fund and the European Central Bank in 2012.

To ensure a similar crisis would not happen again, European authorities, together with the ECB, formulated a three-prong plan: the European Banking Union.

This includes:


1 - Single Rule Book

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All of the EU's banks are governed by one set of rules that cover minimum capital requirements, a deposit guarantee scheme and a framework on how lenders should be rescued.


2 - Single Supervisory Mechanism

This grants the ECB, together with individual countries' banking authorities, the power to monitor the implementation of the Single Rule Book. Not every bank in the 28-country EU is covered by the SSM, but participation is mandatory for lenders in the 19-country euro zone. The biggest banks -- those with more than 30 billion euros in holdings on their balance sheets – are supervised directly by the ECB.

3 - Single Resolution Mechanism

This oversees the rescue and restructuring of Europe's failed banks. As well as bailing out the banks with money from the EU's 500-billion-euro European Stability Mechanism, the SRM would work to break up and sell off parts of a failed bank so it could then become a going concern. To date, it has not been implemented.

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