Valante, D., (2014), “Framing Banking Union in the Euro Area: Some empirical evidence”, CEPS Working Document, N. 389/February 2014.
Evidence shows that financial integration in the euro area is retrenching at a quicker pace than outside the union. Home bias persists: Governments compete on funding costs by supporting ‘their’ banks with massive state aids, which distorts the playing field and feeds the risk-aversion loop. This situation intensifies friction in credit markets, thus hampering the transmission of monetary policies and, potentially, economic growth. This paper discusses the theoretical foundations of a banking union in a common currency area and the legal and economic aspects of EU responses. As a result, two remedies are proposed to deal with moral hazard in a common currency area: a common (unlimited) financial backstop to a privately funded recapitalisation/resolution fund and a blanket prohibition on state aids.
Relevant Posts
- Masciandaro, D. and Passarelli, F., (2013), “Single supervision and resolution rules: Is ECB independence at risk?”, VoxEU, 21 December.
- Davies, H., (2013), “The Fox and the ECB”, Project Syndicate, 19 December.
- Micossi, S., Bruzzone, G. and Carmassi, J., (2013), “The New European Framework for Managing Bank Crises”, The Centre for European Policy Studies, CEPS Policy Brief No.304, 21 November.