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 European Macroeconomics & Governance Tags & Topics

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

Blog Post

André Sapir
Guntram B. Wolff

The Continental Partnership proposal: a reply to five main criticisms

The proposal for a Continental Partnership (CP) has received a great deal of attention. Two of the authors, André Sapir and Guntram Wolff, clarify some misunderstandings and respond to five key criticisms. They argue that the CP does not offer a way for EU members to restrict freedom of movement, nor is there a great risk of “political contagion”. Indeed, a CP arrangement could be the best route for the remaining EU members to maintain strong economic and security cooperation with the UK, while defending themselves against dumping and vetoes.

By: André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: September 27, 2016
Read about event More on this topic

Upcoming Event

Oct
10
12:30

Financial Times/Bruegel European Forum: Where now for the UK and the EU after the vote for Brexit?

Three months after the results of the UK referendum there is still a lot of uncertainty about the future. The Financial Times and Bruegel bring together a panel to discuss the most crucial questions.

Speakers: Lionel Barber, James Blitz, Maria Demertzis, Sylvie Goulard and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More by this author

Parliamentary Testimony

written-evidence-house-of-lords-12-9House of Lords

The future of financial services in the UK following the Brexit vote

UK House of Lords EU Sub-Committee on Financial Affairs' call for evidence on the future of Financial Services in the UK following the vote to leave the European Union.

By: Dirk Schoenmaker Topic: European Macroeconomics & Governance, House of Lords, Parliamentary Testimonies Date: September 15, 2016
Read article More on this topic More by this author

Blog Post

Nicolas Véron

The City will decline—and we will be the poorer for it

Just as the City owes much of its current awe-inspiring prosperity to European integration, the brutal realities of Brexit will make it shrink, not thrive. All this is bleak news, not just for the City but for the UK's economy.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: September 14, 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
Read article Download PDF More on this topic

External Publication

Europe after Brexit

Europe after Brexit: A proposal for a continental partnership

This paper leaves aside the issue of EU reform and focuses on the desirable EU-UK relationship after Brexit. The authors argue that none of the existing models of partnership with the EU would be suitable for the UK. They propose a new form of collaboration, a continental partnership, which is considerably less deep than EU membership but rather closer than a simple free-trade agreement

By: Jean Pisani-Ferry, Norbert Röttgen, André Sapir, Paul Tucker and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: August 29, 2016
Read article More on this topic More by this author

Opinion

IMG_1985

The G20 in a post-Brexit world

As Britain enters a period of political and economic instability, following a referendum vote that many now interpret as anti-globalisation, it is worth reflecting on what the consequences of Brexit will be for the world’s ‘economic steering committee’: the G20.

By: Alessio Terzi Topic: Global Economics & Governance Date: August 18, 2016
Read article More on this topic More by this author

Blog Post

IMG_1985

How to make the single market more inclusive after Brexit

The creation of the single market generated winners and losers. Yet redistribution remains first and foremost a competence of national governments. It is thus fair to state that a failure in national, more than European, policies and welfare systems can be partly blamed for current discontent with the EU and the single market.

By: Alessio Terzi Topic: European Macroeconomics & Governance Date: August 18, 2016
Read article More on this topic

Blog Post

Scott Marcus
IMG_20151119_103626

Brexit and its potential impact on international data transfers

If the UK exits the EU and the EEA, it will have to go to considerable lengths to enable continued data transfers from the EU. Without an agreement on data transfers and data protection, business in the UK and the EU will be disrupted.

By: J. Scott Marcus and Georgios Petropoulos Topic: Innovation & Competition Policy Date: August 4, 2016
Read article More on this topic More by this author

Blog Post

André Sapir

Should the UK pull out of the EU customs union?

The UK Government appears divided on whether the United Kingdom should seek to remain within the European Union’s customs union after Brexit. The United Kingdom is likely to want to leave the customs union, even it remains in the EU’s single market. But the UK should try and keep to the EU’s commitments at the WTO, at least at the start, in order to minimise the trade disruption that Brexit entails.

By: André Sapir Topic: European Macroeconomics & Governance Date: August 1, 2016
Read article More on this topic

Opinion

Grégory Claeys
Schoenmaker pic

Now is the time to open Strasbourg’s ‘Bronislaw Geremek’ European University

It is the right time to revive the proposal made 10 years ago by Bronislaw Geremek and Jean-Didier Vincent to create a truly European University in the European Parliament buildings in Strasbourg.

By: Grégory Claeys and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: August 1, 2016
Read article More on this topic More by this author

Blog Post

Nataraj_Geethanjali_Profile-Picture1

Will TTIP survive Brexit?

There are concerns that the UK’s decision to leave the EU may jeopardise future TTIP negotiations. Some fear Brexit could make the EU a less attractive trade partner for the US. However, it seems that the new US administration as well as upcoming elections in Germany and France could end up posing bigger threats to the trade agreement than Brexit.

By: Geethanjali Nataraj Topic: Global Economics & Governance Date: July 27, 2016
Load more posts