Since the European Council of June 2012, 'banking union' is a key item for the EU's policy agenda. This contribution outlines the state of the policy debate - identifying the elements that are missing but important from a theoretical viewpoint. Concrete proposals are made as to how the missing elements could be added in the form of a new European Deposit Insurance and Resolution Authority, which would work alongside the 'single supervisory mechanism' under which the European Central Bank assumes supervisory powers for the largest eurozone banks. The paper also illustrates how a gradual transition could align incentives and mitigate the political resistance to a full banking union. Finally, new estimates are provided for how much would be needed for a European Deposit Insurance and Resolution Fund. © 2014 John Wiley & Sons Ltd.