Banking Union as a Shock Absorber

Ansgar Belke and Daniel Gros

No 548, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This study investigates the shock-absorbing properties of a banking union by providing a detailed comparison between the way regional financial shocks have been absorbed at the federal level in the US, but have led to severe regional (national) financial dislocation and tensions in the euro area. The extent to which the institutions of the banking union, which is now emerging in the euro area, should increase its capacity to deal with future regional boom and bust cycles is also discussed. Cross-border capital flows in the form of equity appear to be much more stable than those taking the form of credit, especially inter-bank credit. Moreover, credit booms and bust leave a debt overhang and losses can materialise only via insolvencies, whereas equity flows absorb automatically losses in case of a bust and provide the cross border owner with incentives to continue to provide financing. It follows that cross-border banks can absorb regional shocks. But large banks pose the 'too big to fail' problem and they would also propagate regional shocks, especially if they originate in large countries, to the entire area.

Keywords: banking union; currency union; default; shock absorber; two-tier reinsurance system (search for similar items in EconPapers)
JEL-codes: E42 E50 F3 G21 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-ban, nep-eec, nep-mac and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Banking Union as a Shock Absorber (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:548

DOI: 10.4419/86788626

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