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The Limits to Partial Banking Unions: A Political Economy Approach

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  • Foarta, Dana

    (Stanford University)

Abstract

This paper studies the welfare effects of a partial banking union in which cross-country financial transfers that could be used towards bailouts are decided at the supranational level, but policymakers in member countries hold decision power over the distribution of funds. This allows the policymakers, who are partially self-interested, to extract rents in the bailout process. In equilibrium, such a banking union lowers the welfare of citizens in the country receiving transfers. Supranational fiscal rules are ineffective at reversing this result, but a Pareto improvement may be achieved if scale rules are combined with domestic reforms that reduce political rents.

Suggested Citation

  • Foarta, Dana, 2017. "The Limits to Partial Banking Unions: A Political Economy Approach," Research Papers repec:ecl:stabus:3189, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:repec:ecl:stabus:3189
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    Citations

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    Cited by:

    1. Dana Foarta, 2021. "How Organizational Capacity Can Improve Electoral Accountability," BAFFI CAREFIN Working Papers 21156, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Segura, Anatoli & Vicente, Sergio, 2018. "Bank resolution and public backstop in an asymmetric banking union," ESRB Working Paper Series 83, European Systemic Risk Board.
    3. Facundo Piguillem & Alessandro Riboni, 2021. "Fiscal Rules as Bargaining Chips [Growth in the Shadow of Expropriation]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(5), pages 2439-2478.
    4. Perotti, Enrico & Soons, Oscar, 2019. "The Political Economy of a Diverse Monetary Union," CEPR Discussion Papers 13987, C.E.P.R. Discussion Papers.
    5. Xuan Wang, 2019. "When Do Currency Unions Benefit From Default ?," 2019 Papers pwa938, Job Market Papers.
    6. Haufler, Andreas, 2021. "Regulatory and bailout decisions in a banking union," Journal of Banking & Finance, Elsevier, vol. 133(C).
    7. Xuan Wang, 2021. "Bankruptcy Codes and Risk Sharing of Currency Unions," Tinbergen Institute Discussion Papers 21-009/IV, Tinbergen Institute.
    8. Henry L. Friedman & Mirko S. Heinle, 2020. "Influence Activities, Coalitions, and Uniform Policies: Implications for the Regulation of Financial Institutions," Management Science, INFORMS, vol. 66(9), pages 4336-4358, September.
    9. Gersbach, Hans & Haller, Hans & Papageorgiou, Stylianos, 2020. "Regulatory competition in banking: Curse or blessing?," Journal of Banking & Finance, Elsevier, vol. 121(C).
    10. Dana Foarta, 2021. "How Organizational Capacity Can Improve Electoral Accountability," BAFFI CAREFIN Working Papers 21156, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    11. Marius Clemens & Stefan Gebauer & Tobias König, 2020. "The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme," Discussion Papers of DIW Berlin 1873, DIW Berlin, German Institute for Economic Research.
    12. Körner, Tobias & Papageorgiou, Michael, 2024. "Doom loop, trilemma, and moral hazard: Which narrative of the banking union did stock market investors buy?," Discussion Papers 34/2024, Deutsche Bundesbank.

    More about this item

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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