Why euro-zone ‘outs’ should join banking union
Joining the banking union could provide a stable arrangement for managing financial stability for the UK and other non-Euro countries.
In the furore over Brexit, observers have overlooked the benefits that banking union could bring to the UK and other euro-zone ‘outs’.
During the financial crisis, European leaders agreed to create a banking union that would break the link between failing banks and sovereigns. Although it is usually seen as a euro-zone initiative, joining banking union could also provide a stable arrangement for managing financial stability for the UK and other non-Euro countries.
At the moment London is not only an international financial centre, but also the gateway to Europe for the large US and Swiss investment banks. Such banks use their UK banking licence as a passport for their operations throughout the European Union.
Brexit would make this arrangement impossible. There is already speculation that international banks might move their European headquarters from London to Dublin, Frankfurt, or even Amsterdam.
All large European banks have operations in London, including major banks like Deutsche Bank, BNP Paribas and ING. In recent research we found evidence of strong cross-border banking claims, including for the United Kingdom.
The question is how to manage financial stability in the light of these interconnections. Outside the banking union, the governments of the euro-zone ‘outs’ are the ultimate fiscal backstop for their own banks, responsible for bailing them out in times of crisis.
For Sweden, that is the case for Nordea Bank, which has large operations in the banking union, in Finland and the Baltics. Sweden would have to finance a potential bailout on its own. In a similar way, the UK government is charged with ensuring the stability of the UK financial system.
Outside the banking union, the governments of the euro-zone ‘outs’ are responsible for bailing them out in times of crisis.
The global financial crisis has shown that such a backstop function can be costly for governments, but they could manage financial stability jointly within the banking union rather than independently.
National authorities would then share supervisory responsibility with the European Central Bank. The responsibility for resolution would rest with the new Single Resolution Board. Importantly, the Single Resolution Fund would facilitate burden sharing in a banking crisis.
The ‘outs’ could even join banking union without joining the euro.
The ‘outs’ could even join banking union without joining the euro. While banking union is mandatory for the euro countries, the ‘outs’ can opt-in. Opting-in makes sense for managing financial stability, as it would allow an integrated approach towards supervision, avoiding ring fencing of activities and therefore a higher cost of funding. It would also simplify bank resolution, avoiding coordination failure.
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