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Banking Union Optimal Design under Moral Hazard

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  • Marius Andrei Zoican
  • Lucyna Anna Gornicka

Abstract

A banking union limits international bank default contagion, eliminating inefficient liquidations. For particularly low short-term returns, it also stimulates interbank flows. Both effects improve welfare. An undesirable effect arises for moderate moral hazard, since the banking union encourages risk taking by systemic institutions. If banks hold opaque assets, the net welfare effect of a banking union can be negative. Restricting the banking union mandate restores incentives, improving welfare. The optimal mandate depends on moral hazard intensity and expected returns. Net creditor countries should contribute most to a joint resolution fund, less so if a banking union distorts incentives.

Suggested Citation

  • Marius Andrei Zoican & Lucyna Anna Gornicka, 2014. "Banking Union Optimal Design under Moral Hazard," 2014 Papers pzo33, Job Market Papers.
    • Handle: RePEc:jmp:jm2014:pzo33
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    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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