Opinion

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.

By: and Date: February 11, 2016 Topic: European Macroeconomics & Governance

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.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to communication@bruegel.org.

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

Blog Post

Building a stable european deposit insurance scheme

Deposit insurance, like any insurance scheme, raises moral hazard concerns. Such concerns arising from European deposit insurance can be alleviated through a country-specific component in the risk-based premium for deposit insurance and limits on sovereign bond exposures on bank balance sheets. This column argues, however, that proposals to maintain national compartments in a new European Deposit Insurance Scheme are self-defeating, as such compartments can be destabilising in times of crisis.

By: Dirk Schoenmaker Topic: Finance & Financial Regulation Date: April 19, 2018
Read article More on this topic More by this author

Blog Post

The debate on euro-area reform

A paper jointly written by 14 French and German economists set off a debate about the reform of euro-area macroeconomic governance. We review economists’ opinions about it.

By: Silvia Merler Topic: Finance & Financial Regulation Date: April 16, 2018
Read article More on this topic More by this author

Opinion

The Lesser Evil for the Eurozone

For three decades, the consensus within the European Commission and the European Central Bank on the need for market reforms and sound public finances has been strong enough to overcome opposition in small countries and outlast procrastination in large ones. Today, however, the Eurozone playing field has become a battleground.

By: Jean Pisani-Ferry Topic: Finance & Financial Regulation Date: April 4, 2018
Read article More by this author

Podcast

Podcast

Director's Cut: Developing deposit insurance in Europe

In this week’s Director’s Cut of ‘The Sound of Economics’ podcast, Bruegel director Guntram Wolff talks with Nicolas Véron, senior fellow at Bruegel, about the implementation of a European Deposit Insurance Scheme (EDIS), one of the three pillars needed for the completion of banking union.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 3, 2018
Read article More on this topic

Blog Post

Do wide-reaching reform programmes foster growth?

With growth gathering momentum in the eurozone, some have claimed this is the proof that structural reforms implemented during the crisis are working, re-opening the long-standing debate on the extent to which reforms contribute to fostering long-term growth. This column employs a novel empirical approach – a modified version of the Synthetic Control Method – to estimate the impact of large reform waves implemented in the past 40 years worldwide.

By: Alessio Terzi and Pasquale Marco Marrazzo Topic: European Macroeconomics & Governance Date: March 28, 2018
Read article More on this topic More by this author

Blog Post

The Brexit Transition Deal

Michel Barnier, the European Union’s Brexit negotiator, and David Davis, Britain’s Brexit secretary, announced a transition deal on March 19. We review recently published opinions about the deal and its implications.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: March 26, 2018
Read article More on this topic More by this author

Opinion

Europe needs a strong Italy

Europe needs to have its Italian voice. A stable government is required not only to pursue domestic policies and remain fiscally prudent but also to negotiate on euro-area reform, priorities in the EU budget and intensifying competition in global trade.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 20, 2018
Read article Download PDF More on this topic

Policy Brief

Rethinking the European Union’s post-Brexit budget priorities

There will be a €94 billion Brexit-related hole in the EU budget for 2021-27 if business continues as before and the United Kingdom does not contribute. The authors show that freezing agriculture and cohesion spending in real terms would fill the hole, but new priorities would then need to be funded by an increase in the percent of GNI contribution.

By: Zsolt Darvas and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 19, 2018
Read article Download PDF More by this author

Parliamentary Testimony

House of Commons

Post-Brexit migration policy

On 27 February 2018 Zsolt Darvas testified at the Home Affairs Committee of the House of Commons. This inquiry explores the potential trade-offs between economic integration and migration policy, and the UK and EU’s approach to the negotiations.

By: Zsolt Darvas Topic: House of Commons, Testimonies Date: March 9, 2018
Read article More on this topic More by this author

Blog Post

Getting accustomed to Brexit - UK and the customs union scenario

The Labour Party’s support of customs union membership has the potential to change the course of Brexit, with 13 months left to close negotiations. This week we review the commentary around the possibility of a post-Brexit EU-UK Customs Union.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: March 5, 2018
Read article More on this topic More by this author

Podcast

Podcast

Euro-area governance: Where next?

Bruegel deputy director Maria Demertzis hosts this episode of 'The Sound of Economics', with Gideon Rachman, chief foreign affairs correspondent at the Financial Times, and Manfred Weber, chair of the EPP Group in the European Parliament, joining Bruegel director Guntram Wolff for a discussion of the future of euro-area governance.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 1, 2018
Read article More on this topic

Blog Post

Don’t put the blame on me: How different countries blamed different actors for the Eurozone crisis

Why did the eurozone have such difficulties coming to terms with its own shortcomings? The authors believe they have found part of the answer, through an algorithm-based cross-country media analysis.

By: Henrik Müller, Giuseppe Porcaro and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: March 1, 2018
Load more posts