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Banking union: will it end up the crisis in Europe?

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Banking union: will it end up the crisis in Europe?

  1. 1. Banking union: will it end up the crisis in Europe? Marius Skuodis 26 July 2013, Klaipėda
  2. 2. Content • What is a banking union? • Why is it needed in Europe? • What are the main challenges? • Will it end up the crisis?
  3. 3. Completing the EMU • Rompuy’s Report (2012) proposed four building blocks for a “genuine EMU”: – Integrated financial framework; – Integrated budgetary framework; – Integrated economic policy framework; – Democratic legitimacy and accountability.
  4. 4. Single rSingle r Main elements of the banking union Single Supervisory Mechanism Single Supervisory Mechanism Single Resolution Mechanism* Single Resolution Mechanism* Deposit guarantee framework Deposit guarantee framework Single rulebook * Plus ESM direct bank recapitalisation instrument.
  5. 5. Europe’s financial trilemma Only two objectives are compatible Only two objectives are compatible Financial stability National financial policies Cross-border banking Source: Schoenmaker, 2009.
  6. 6. Why a banking union? • Lessons from the crisis: – Inadequate regulation and supervision; – Lack of cooperation in crisis management; – Fragmentation of the Single Market; – Vicious circle between sovereigns and banks; – Negative externalities for taxpayers. • Need to revive lending and growth.
  7. 7. Fragmentation of the Single Market Source: ECB, 2013.
  8. 8. Single rSingle r Progress on the banking union SSM – second half of 2014 SSM – second half of 2014 SRM – recent proposal SRM – recent proposal ?? Negotiations on the single rulebook
  9. 9. Single resolution fund too small? Source: ECB and Open Europe, 2012. Bank assets: ~ €45 trillion (359 % of GDP) in the EU; ~ €32,5 trillion (342 % of GDP) in the euro area. Proposed Single Resolution Fund: ~ €55 billion in 10 years; ESM direct bank recapitalisation: - Up to €60 billion.
  10. 10. No common deposit insurance? • Supranational decisions – national consequences? • Remaining sovereign- bank link.
  11. 11. Sovereign-bank link encouraged by financial regulation? • Banks in Southern Europe hold more than €700 billion of sovereign debt – two times more than before the crisis.
  12. 12. Banking union is not a Holy Grail • Only one of four building blocks towards a “genuine EMU”; • Other lessons from the crisis – two views: – Economic and political integration is lagging behind monetary integration (incomplete mandate of the ECB; no system of fiscal transfers, no debt mutalisation; democratic deficit, etc.); – Institutions of the EMU are not fit for purporse (disregard of common rules, insufficient incentives to implement structural reforms, etc.).
  13. 13. Growth challenge
  14. 14. Conclusion • Banking union is necessary to decrease the probability of similar situations in the future, but there is a risk of having an incomplete European financial framework; • It is only one of four building blocks of strengthening the EMU; • If “own house in order” principle is not respected, European solutions will not be sufficient.

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