Framing Banking Union in the Euro Area: Some empirical evidence. CEPS Working Document No. 389, 3 February 2014

Valiante, Diego. (2014) Framing Banking Union in the Euro Area: Some empirical evidence. CEPS Working Document No. 389, 3 February 2014. [Working Paper]

Preview

PDF - Published Version Download (1197Kb) | Preview

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.

Actions (login required)