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Banking integration in the EMU: Let’s get real!

Mathias Hoffmann, Egor Maslov, Bent Sørensen, Iryna Stewen, (2019), «Banking integration in the EMU: Let’s get real!», VoxEU, 10 Ιανουαρίου

We argue that the situation in the euro area today is reminiscent of banking in the US pre-1980, where there was a common interbank market but little deep interstate banking integration due to restrictive banking laws. The removal of barriers to entry for out-of-state banks considerably improved access to finance, in particular for small firms, and contributed to higher growth, lower state-level business cycle volatility (Jayaratne and Strahan 1996, Morgan et al. 2004, Rice and Strahan 2010, Kroszner and Strahan 2014), and better and more resilient interstate risk-sharing (Demyanyk et al. 2007, Hoffmann and Shcherbakova-Stewen 2011).

In Europe today there are no formal barriers to entry for banks from other member countries, but there are many de facto barriers to cross-border branching or to the cross-border consolidation of banks. These include the absence of a common resolution mechanism for banks, the absence of a common deposit insurance scheme, and the tendency of national governments to promote domestic banks as ‘national champions’.

We argue that these barriers lead to a lack of real, direct banking integration in the euro area. This created high macroeconomic costs during the global crisis.

In Hoffmann et al. (2018a), we show that, across the EMU, sectors with many small firms were particularly dependent on the domestic banking system for credit, making them exposed to the collapse in cross-border interbank lending during the financial crisis.

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