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Banking Unions: Distorted Incentives and Efficient Bank Resolution

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  • Marius A. Zoican

    (VU University Amsterdam)

  • Lucyna A. Górnycka

    (University of Amsterdam)

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    Abstract

    This paper studies the optimality of a banking union in a setting with cross-country liquidity spillovers and moral hazard. Generally, the banking union improves welfare by efficiently providing liquidity to banks, thus limiting spillovers from bank defaults across the member countries. At the same time, however, the banking union will resort to bank bailouts more often, distorting risk incentives of banks. For low bank liquidation costs, the net welfare e ffect of a banking union can be thus negative. For welfare enhancing banking unions, countries with net creditor banking systems always pay most of the joint bailout costs. In equilibrium, all countries are less willing to join a banking union which induces moral hazard.

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    Bibliographic Info

    Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 13-184/VI.

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    Date of creation: 12 Nov 2013
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    Handle: RePEc:dgr:uvatin:20130184

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    Related research

    Keywords: banking; financial intermediation; risk shifting; banking union;

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    References

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    1. X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
    2. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
    3. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    4. Thomas Philippon, 2010. "Debt Overhang and Recapitalization in Closed and Open Economies," IMF Economic Review, Palgrave Macmillan, vol. 58(1), pages 157-178, August.
    5. Allen, Franklin & Carletti, Elena & Gale, Douglas, 2009. "Interbank market liquidity and central bank intervention," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 639-652, July.
    6. Dell'Ariccia, Giovanni & Marquez, Robert, 2006. "Competition among regulators and credit market integration," Journal of Financial Economics, Elsevier, vol. 79(2), pages 401-430, February.
    7. V.V. Chari & Patrick J. Kehoe, 2013. "Bailouts, time inconsistency, and optimal regulation," Staff Report 481, Federal Reserve Bank of Minneapolis.
    8. Patrick Kehoe & V.V. Chari, 2010. "Bailouts, Time Inconsistency, and Optimal Regulation," 2010 Meeting Papers 527, Society for Economic Dynamics.
    9. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund - An Update," CEPS Papers 7276, Centre for European Policy Studies.
    10. Carmassi, Jacopo & Di Noia, Carmine & Micossi, Stefano, 2012. "Banking Union: A federal model for the European Union with prompt corrective action," CEPS Papers 7308, Centre for European Policy Studies.
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