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A Blueprint for Completing the Banking Union

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  • Micossi, Stefano

Abstract

Completing the banking union is an urgent project facing the EU, given the eurozone’s continued vulnerability to idiosyncratic liquidity shocks to national banking systems. The proposed changes to the European deposit insurance scheme (EDIS) under consideration by the European Commission could open the way to a satisfactory compromise between the twin needs to reduce legacy risks in banks’ balance sheets and to provide greater risk-sharing and a fiscal backstop for both the Resolution and the EDIS Funds – while continuing to exclude any sharing of past losses. With such a compromise, financial fragmentation would likely recede rapidly, leading to a larger role by private capital in cushioning real and financial idiosyncratic shocks. EDIS could move forward immediately by providing in its early phase that the European Stability Mechanism would provide a liquidity line to national deposit guarantee schemes that had exhausted their funds, with no sharing of losses. Meanwhile, risk-reduction would accelerate through the stronger policies already established by the Single Supervisory Mechanism for the reduction of non-performing loans and a fresh approach to the reduction of banks’ sovereign exposures, based on a modified version of the large exposure prudential policy. Direct risk-weighting of national sovereigns would be excluded. The ultimate anchor of a stable banking union would be credible policies to reduce excessive sovereign debt-to-GDP ratios. This paper argues that a combination of a strengthened debt rule in the Stability and Growth Pact and a market discipline mechanism entailing the obligation to issue junior bonds, subject to restructuring, for the countries violating the common budgetary rules, could offer a suitable way forward to restore the credibility of the Pact. It also argues that effective policy coordination within the eurozone also requires greater symmetry of policy obligations by the member states, which may be built into the European Semester through an appropriate revision of the macroeconomic imbalance procedure.

Suggested Citation

  • Micossi, Stefano, 2017. "A Blueprint for Completing the Banking Union," CEPS Papers 13212, Centre for European Policy Studies.
    • Handle: RePEc:eps:cepswp:13212
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    File URL: https://www.ceps.eu/system/files/PI_2017_42_SM_BlueprintCompletingBU.pdf
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    4. Gros, Daniel, 2013. "Banking Union with a Sovereign Virus: The self-serving regulatory treatment of sovereign debt in the euro area," CEPS Papers 7904, Centre for European Policy Studies.
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    1. Pierpaolo Benigno & Paolo Canofari & Giovanni Bartolomeo & Marcello Messori, 2024. "The Spectre of Financial Dominance in the Eurozone," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 10(1), pages 59-80, March.
    2. Pierpaolo Benigno & Paolo Canofari & Giovanni Di Bartolomeo & Marcello Messori, 2021. "Financial Dominance in the Pandemic and Post-Pandemic European Economy," Working Papers in Public Economics 206, Department of Economics and Law, Sapienza University of Roma.
    3. Paolo Canofari & Alessandra Marcelletti & Marcello Messori, 2020. "Redenomination Risk and Bank Runs in a Monetary Union with and Without Deposit Insurance Schemes," Open Economies Review, Springer, vol. 31(2), pages 237-256, April.
    4. Francesco Spadafora, 2020. "Completing the Economic and Monetary Union: Wisdom Come Late?," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 6(3), pages 379-409, November.
    5. Micossi, Stefano & Peirce, Fabrizia, 2020. "Overcoming the gridlock in EMU decision-making," CEPS Papers 26688, Centre for European Policy Studies.
    6. Goodhart, C. A. E. & Sato, Hideki, 2024. "A note on the differences between European and international methodologies of banking regulation and supervision," LSE Research Online Documents on Economics 122044, London School of Economics and Political Science, LSE Library.
    7. Francesco Spadafora, 2019. "European integration in the time of mistrust," Questioni di Economia e Finanza (Occasional Papers) 512, Bank of Italy, Economic Research and International Relations Area.

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