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Banking Unions: Distorted Incentives and Efficient Bank Resolution

Author

Listed:
  • Marius A. Zoican

    (VU University Amsterdam)

  • Lucyna A. Górnicka

    (University of Amsterdam)

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, as 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 the joint resolution fund, less so if a banking union distorts incentives.

Suggested Citation

  • Marius A. Zoican & Lucyna A. Górnicka, 2013. "Banking Unions: Distorted Incentives and Efficient Bank Resolution," Tinbergen Institute Discussion Papers 13-184/VI, Tinbergen Institute, revised 16 May 2014.
  • Handle: RePEc:tin:wpaper:20130184
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    References listed on IDEAS

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    More about this item

    Keywords

    banking; financial intermediation; risk shifting; banking union;
    All these keywords.

    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
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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