Framing Banking Union in the Euro Area: Some empirical evidence

Diego Valiante

CEPS Papers from Centre for European Policy Studies

Abstract: 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.

Pages: 26 pages
Date: 2014-02
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-mon
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eps:cepswp:8882

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