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Hazardous tango: sovereign-bank interdependence and financial stability in the euro area

The strong interdependence between banking and sovereign crisis has emerged as a salient feature of euro area crisis. This interdependence, for sure, is not a specific feature of the euro area. But as pointed out by several authors the vicious cycle seems to be extremely strong in the euro area. The reason why euro area […]

By: and Date: April 15, 2012 Topic: European Macroeconomics & Governance

The strong interdependence between banking and sovereign crisis has emerged as a salient feature of euro area crisis. This interdependence, for sure, is not a specific feature of the euro area. But as pointed out by several authors the vicious cycle seems to be extremely strong in the euro area.

The reason why euro area banks and sovereigns seem to be indissolubly tied together is twofold. On one hand, in the absence of a supranational banking resolution framework, member states keep individual responsibility for the rescue of their national banking system. Given the size of the banking systems across the euro area, this implies that the fiscal consequences of rescuing banks are potentially very large and explains how stress in the banking system can spill over to sovereigns.

On the other hand, domestic banks hold on their balance sheets a considerable share of the debt issued by their domestic government. Any doubt about sovereign solvency immediately therefore affects domestic banks. This two-way bank-sovereign interdependence constitutes one of the specifi c features of the euro area that renders it especially fragile.

In spite of this demonstrated weakness there has been surprisingly little policy action to remedy this state of affairs. Proposals for giving the European Union or the euro area responsibility for rescuing banks, or at least backstopping national authorities, have been consistently rejected.

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Podcast

Podcast

The future of Capital Markets Union

Bruegel senior scholar Nicolas Véron speaks with Steven Maijoor, the chair of ESMA, about the future of the Capital Markets Union (CMU), and of the EU's financial supervisory architecture.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: November 16, 2017
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Past Event

Past Event

Financial Stability Conference 2017

EU at Crossroads: How to respond to Misalignments in Bank Regulation and achieve a consistent financial Framework?

Topic: Finance & Financial Regulation Location: Berlin, Germany Date: October 18, 2017
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Policy Contribution

Precautionary recapitalisation: time for a review?

While precautionary recapitalisation is a legitimate instrument for bank crisis management, the conditions set for it by BRRD (Bank Recovery and Resolution Directive) are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Nevertheless, the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: July 13, 2017
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External Publication

European Parliament

Precautionary recapitalisations: time for a review

Precautionary recapitalisation, a tool for public intervention in the banking sector defined in the Bank Recovery and Resolution Directive (BRRD), is a legitimate instrument for bank crisis management. The conditions set for it by BRRD are restrictive and have so far been effective to prevent its inappropriate use on insolvent banks. Outside of the scope of BRRD, the co-legislators should consider a reform of the EU audit framework to improve audit quality, and the European Stability Mechanism should be empowered to participate in future precautionary recapitalisations.

By: Nicolas Véron Topic: European Parliament, Finance & Financial Regulation Date: July 12, 2017
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Policy Contribution

A macro approach to international bank resolution

As regulators rush to strengthen banking supervision and implement bank resolution regimes, a macro approach to resolution is needed that considers both the contagion effects of bail-in and the continuing need for a fiscal backstop to the financial system. This can be facilitated through the completion of a banking union in which the European Stability Mechanism (ESM) becomes the fiscal backstop to the euro-area banking system.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: July 10, 2017
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Past Event

Past Event

Is there a way out of non-performing loans in Europe?

At this event we looked at the issue of non-performing loans in Europe. The event also saw the launch of the latest issue of "European Economy – Banks, Regulation and the Real Sector."

Speakers: Emilios Avgouleas, Giorgio Barba Navaretti, Giacomo Calzolari, Maria Demertzis, Martin Hellwig, Helen Louri and Laura von Daniels Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 6, 2017
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Blog Post

EBA relocation should support a long-term ‘twin peaks’ vision

As the Commission launches a review of European financial supervision, the authors argue that Europe needs to move towards a twin peaks model – dividing supervision of prudential and conduct-of-business issues. But this is a long-term vision, and will require institution building. The immediate priorities are to choose a new home for the EBA and reinforce ESMA.

By: Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: April 5, 2017
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Policy Contribution

European Parliament

Carving out legacy assets: a successful tool for bank restructuring?

Separating ‘legacy assets’ from banks’ core business is central to the rehabilitation of Europe’s banking system. How can Europe progress in its ongoing effort to rid the financial system of legacy assets, and equip it with renewed growth?

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 21, 2017
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External Publication

European Parliament

Carving out legacy assets: a successful tool for bank restructuring?

Separating ‘legacy assets’ from banks’ core business is central to the rehabilitation of Europe’s banking system. How can Europe progress in its ongoing effort to rid the financial system of legacy assets, and equip it with renewed growth?

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: March 17, 2017
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Policy Contribution

What happened to global banking after the crisis?

The global financial crisis allegedly led to the end of global banking. However, Dirk Schoenmaker finds that reports of the demise of global banking are premature.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: March 14, 2017
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Blog Post

Brexit should drive integration of EU capital markets

Brexit offers EU-27 countries a chance to take some of London’s financial services activity. But there is also a risk of market fragmentation, which could lead to less effective supervision and higher borrowing costs. To get the most out of Brexit, the EU financial sector needs a beefed up ESMA.

By: Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 24, 2017
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Policy Brief

Making the best of Brexit for the EU27 financial system

The EU27 needs to upgrade its financial surveillance architecture to minimise the financial market fragmentation resulting from Brexit and the corresponding increase in borrowing costs for firms.

By: André Sapir, Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation Date: February 8, 2017
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