Banking Union Optimal Design under Moral Hazard

Marius Zoican and Lucyna Anna Gornicka

2014 Papers from Job Market Papers

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

JEL-codes: G15 G18 G21 (search for similar items in EconPapers)
Date: 2014-10-29
New Economics Papers: this item is included in nep-ban and nep-cta
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