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Banking Union : a solution to the euro zone crisis

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  • Maylis Avaro

    (École normale supérieure de Cachan)

  • Henri Sterdyniak

    (OFCE)

Abstract

In June 2012 European Council launched the banking union as a new project expected to contribute to solve the euro area crisis. Is banking union a necessary supplement to monetary union or a new rush forward? A banking union would break the link between the sovereign debt crisis and the banking crisis, by asking the ECB to supervise banks, by establishing common mechanisms to solve banking crises, and by encouraging banks to diversify their activities. The banking union project is based on three pillars: a Single Supervisory Mechanism (SSM), a Single Resolution Mechanism (SRM), a European Deposit Guarantee Scheme (EDGS). Each of these pillars raises specific problems. Some are related to the current crisis (can deposits in euro area countries facing difficulties be guaranteed?); some other issues are related to the EU complexity (should the banking union include all EU member states? Who will decide on banking regulations?), some other issues are related to the EU specificity (is the banking union a step towards more federalism?); the more stringent are related to structural choices regarding the European banking system. Banks'solvency and ability to lend, would depend primarily on their capital ratios, and thus on financial markets' sentiment. The links between the government, firms, households and domestic banks would be cut, which is questionable. Will governments be able tomorrow to intervene to influence bank lending policies, or to settle specific public banks? An opposite strategy could be promoted: restructuring the banking sector, and isolating retail banking from risky activities. Retail banks would focus on lending to domestic agents, and their solvency would be guaranteed by the interdiction to run risky activities on financial markets. Can European peoples leave such strategic choices in the hands of the ECB?

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/144pedpca18ff8v7fh3tvnp99m.

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Date of creation: Apr 2014
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Publication status: Published in Revue de l'OFCE - Débats et politiques, 2014, pp.195-241
Handle: RePEc:spo:wpmain:info:hdl:2441/144pedpca18ff8v7fh3tvnp99m

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Keywords: Banking union; European Construction;

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  1. Jan Kregel, 2011. "Will restricting proprietary trading and stricter derivatives regulation make the US financial system more stable?," PSL Quarterly Review, Economia civile, vol. 64(258), pages 227-247.
  2. Julian T. S. Chow & Jay Surti, 2011. "Making Banks Safer," IMF Working Papers 11/236, International Monetary Fund.
  3. Zsolt Darvas & Silvia Merler, 2013. "The European Central Bank in the age of banking union," Policy Contributions 796, Bruegel.
  4. 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.
  5. Charles Goodhart, 2000. "The Organisational Structure of Banking Supervision," FMG Special Papers sp127, Financial Markets Group.
  6. Repullo, Rafael, 2000. "Who Should Act as Lender of Last Resort? An Incomplete Contracts Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 580-605, August.
  7. Schoenmaker, Dirk & Gros, Daniel, 2012. "A European Deposit Insurance and Resolution Fund," CEPS Papers 6918, Centre for European Policy Studies.
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