39141. Framing Banking Union in the Euro Area: Some empirical evidence
- Author:
- Diego Valiante
- Publication Date:
- 02-2014
- Content Type:
- Working Paper
- Institution:
- Centre for European Policy Studies (CEPS)
- 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.
- Topic:
- Economics, International Trade and Finance, and Monetary Policy
- Political Geography:
- Europe