Blog Post

European banking union: should the ‘outs’ join in?

To address coordination failures between national institutions regulating banks, we need supranational policies. Banking union encourages further integration of banks across borders, deepening the single market, and could also benefit countries outside the euro which have a high degree of cross-border banking.

By: and Date: February 4, 2016 European Macroeconomics & Governance Tags & Topics

The ultimate rationale of banking union

Banking union was conceived as a reply to one of the root causes of the European debt crisis: the sovereign-bank loop. To break the loop, euro-area leaders decided to move responsibility for banking supervision and resolution to the European level.

Banking union consists of the SSM (Single Supervisory Mechanism) and the SRM (Single Resolution Mechanism). While euro-area members have been included in the banking union by default, the SSM and the SRM allow non-euro EU countries to participate.

For these countries, if and when to join the banking union is an important strategic question, but opposing positions have emerged (Figure 1).

Sweden declared in 2014 that it would not join banking union in the foreseeable future, and has stuck to this position since, remaining the United Kingdom’s most sceptical ally.

In contrast, Denmark’s government declared in April 2015 that it wanted to become part of the banking union, which it viewed as being in the interests of its financial sector.

In central and eastern Europe, the Czech Republic, Hungary and Poland have adopted a ‘wait-and-see’ approach, while Bulgaria and Romania are more positive about joining banking union.

 

The ‘wait and see’ countries fear that joining banking union might imply joining the euro beforehand. However, as we argue in our policy contribution,the long-term rationale of banking union is linked to cross-border banking in the single market, which goes beyond the single currency.

The long-term rationale of banking union is linked to cross-border banking in the single market, which goes beyond the single currency

Following this argument, the debate surrounding the question of opting-in is not necessarily a debate about joining the full package  of economic and monetary union and banking union.

When banks are supervised and regulated by national institutions, but operate across borders, authorities do not take into account the cross-border externalities of their actions. This can lead to coordination failures between national authorities,

To address these coordination failures, we need supranational policies. The coordination failure argument is related to the EU single market, which allows unfettered cross-border banking.

Banking union encourages further integration of banks across borders, deepening the single market. Cross-border banking is thus the ultimate rationale for banking union. Banking union could also benefit countries outside the euro, which have a high degree of cross-border banking.

Cross-border banking exposure in the euro-zone ‘outs’

The international reach of a country’s banking sector can be captured by dividing cross-border banking into outward and inward banking claims. Outward banking captures the exposure of multinational banking groups to other countries, beyond the domestic market, while inward banking is defined as the banking claims from abroad on the country in question.

Outward banking of the largest banks is captured in Table 2, which indicates the geographic segmentation of the top 10 banks outside the banking union. Overall, these banks hold 50 percent of their assets in their home country, 10 percent in the banking union market, 8 percent in other European countries and 32 percent in the rest of the world.

One bank with large operations in the banking union is Barclays (UK), which holds 22 percent of assets in the banking union, mainly in Italy (5.1 percent), Spain (3.7 percent), Germany (3.4 percent) and France (2.9 percent). But the British bank has announced that it will soon sell its Italian and Spanish operations.

The euro-zone ‘outs’, in particular the Scandinavians, have a large share of outward banking claims to the rest of Europe.

Nordea (Sweden), SEB Group (Sweden) and Danske Bank (Denmark) have assets amounting to 18 percent, 14 percent and 12 percent, respectively, in the banking union (in particular Finland and the Baltics). These three banks are pan-Nordic banks.

This indicates that the euro-zone ‘outs’, in particular the Scandinavians, have a large share of outward banking claims to the rest of Europe. If all of the ‘outs’ joined banking union, the potential improvement in supervisory coverage would be the 10 percent of assets held in the banking union and the 8 percent of assets held in other European countries that are not yet part of the banking union.

Table2

In terms of inward banking, the share of cross-border subsidiaries in central and Eastern Europe is very high, with inward claims ranging from 39 and 80 percent, as shown in Table 4.

The vast majority of these subsidiaries come from banks headquartered in the banking union (60 out of 65 percent), often Western European banks such as ING, KBC Group, Erste Group and UniCredit.

Table4

In contrast, Sweden and Denmark have only moderate inward claims (not in the table). The United Kingdom is a special case. It is the only EU country which has more inward claims coming from banks in the rest of the world than from banks headquartered in the rest of the European Union.

As for the share coming from the rest of the world, major US and Swiss investment banks form a substantial part. These banks use their London offices as a springboard to conduct business across the European Union, reflecting the importance of London as an international financial centre.

Conclusion

The Nordic countries are characterised by extensive outward banking towards the banking union area, while inward banking from the banking union is particularly important for the six ‘outs’ located in central and eastern Europe. Taken together, this indicates that these ‘outs’ might benefit from banking union membership (see Table 5).

 

Table5

For the Nordics, joining banking union would increase the effectiveness and efficiency of the supervision and resolution of the larger European cross-border banks, allowing supervision and resolution at the supranational level.

While the SRM is a complicated coordination mechanism, the Single Resolution Board has to take a wider perspective for the resolution of banking union banks. This banking union wide mandate should prevent the splitting of banks on national lines in the resolution process, as happened during the great financial crisis.

For the ‘outs’ in central and eastern Europe, the banking union would be a more stable arrangement for managing financial stability and maintaining lending capacity than the Vienna Initiative, which was used on an ad-hoc basis during the crisis.

Finally, for the United Kingdom, joining banking union would also be beneficial, but there is strong political opposition. Given the strong financial links within the banking union, the Bank of England and the ECB  will have to cooperate closely in order to ensure financial stability.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More on this topic More by this author

Policy Contribution

PC 07 2017 cover

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
Read article More on this topic More by this author

Podcast

Podcast

Banks and borrowers in distress — Europe's NPL crisis

European banks are struggling with high amounts of non-performing loans. We look at the reasons behind this crisis, and how it affects banks, borrowers and the European economy as a whole. Finally, we explore potential solutions.

By: The Sound of Economics Topic: Finance & Financial Regulation Date: March 10, 2017
Read article Download PDF More on this topic

Policy Brief

PB 17 01

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
Read article More on this topic

Blog Post

MariaDemertzis1 bw
sd-12177-_0028bea2-web

Bruegel conference discusses strategies to tackle Europe’s NPL crisis

Bad loans and private sector debt distress are widely acknowledged to hold back investment and growth in Europe. It was good, then, to hear ECB Vice-President Vítor Constâncio call for a comprehensive strategy to address the non-performing loans problem at an event hosted by Bruegel last week.

By: Maria Demertzis and Alexander Lehmann Topic: Finance & Financial Regulation Date: February 7, 2017
Read article More on this topic More by this author

Blog Post

Silvia Merler

The strange case of the MPS capital shortfall

Italy's banking saga continues with the announcement that beleaguered MPS may need to find an additional €3bn. What exactly has changed, and what does it say about ECB decision making?

By: Silvia Merler Topic: Finance & Financial Regulation Date: December 27, 2016
Read article Download PDF More by this author

Policy Contribution

pc-23-12European Parliament

The impact of the legal and operational structures of euro-area banks on their resolvability

Following the financial crisis, the question of how to handle a big bank’s collapse has come to the fore. This Policy Contribution evaluates the obstacles to resolvability that the legal and operational structures of the large euro-area banks could pose to the European Union’s new resolution regime.

By: Dirk Schoenmaker Topic: European Parliament, Finance & Financial Regulation, Parliamentary Testimonies Date: December 6, 2016
Read article Download PDF More on this topic More by this author

External Publication

cover-ep

The impact of the legal and operational structures of euro-area banks on their resolvability

This paper evaluates the obstacles to resolvability that the legal and operational structures of the large euro-area banks could present, assuming that it is possible to liquidate smaller and medium-sized banks through a transfer of the relevant activities to other banks.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: December 6, 2016
Read article Download PDF

Working Paper

cover

Reform of the European Union financial supervisory and regulatory architecture and its implications for Asia

This Working Paper reviews recent developments in the EU’s financial supervisory and regulatory architecture with a view to draw out lessons for regional financial regulatory architecture in Asia.

By: Zsolt Darvas, Dirk Schoenmaker and Nicolas Véron Topic: Finance & Financial Regulation, Global Economics & Governance Date: November 17, 2016
Read article More on this topic More by this author

Opinion

Nicolas Véron

Breaking the vicious circle

Nicolas Véron argues that EU banking union can only be complete if the vast amounts of domestic sovereign debt held by many banks are reduced

By: Nicolas Véron Topic: Finance & Financial Regulation Date: October 21, 2016
Read article More on this topic More by this author

Blog Post

sd-12177-_0028bea2-web

ECB bank supervision cannot tackle debt restructuring single-handedly

The European Central Bank has begun to tackle a key symptom of banking sector fragility with its proposed guidelines on banks’ management of non-performing loans (NPLs). But detailed targets for the reduction of NPLs and prescriptions for the internal governance and management of distressed assets also represent a new style of more intrusive supervision. For the ECB to succeed in bank rehabilitation, a macroeconomic scenario should guide the deleveraging process, capacity needs to be built, and governments will need to support a more holistic restructuring effort.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: October 13, 2016
Read article Download PDF More on this topic

Policy Contribution

pc-17-16

Fiscal capacity to support large banks

This Policy Contribution outlines a fiscal cost scenario for the recapitalisation of large banks during a severe systemic crisis.

By: Pia Hüttl and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: October 3, 2016
Read article Download PDF More on this topic

Policy Contribution

cover

What are the prerequisites for a euro-area fiscal capacity?

In this Policy Contribution, Maria Demertzsis and Guntram B. Wolff discuss three progressive steps for strengthening the fiscal framework at the euro-area level. These lead to less interference in national fiscal policymaking thanks to a more credible no-bailout clause, increased risk sharing and different degrees of provision of euro-area-wide public goods and fiscal stabilisation.

By: Maria Demertzis and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 9, 2016
Load more posts