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Last Call for a Banking Union in the Euro Area

Author

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  • Diego Valiante

Abstract

The current monetary policy framework to avert the ongoing financial disintegration in the eurozone and to break the vicious circle that ties up banks and governments in a death grip (liquidity ring-fencing) does not allow effective policies to deal properly with the problems affecting interbank cross-border money market lending or merger and acquisition activities of banks. To promote a real "banking union," this paper proposes two complementary interventions: a monetary policy intervention and an institutional set-up coupled with common recovery and liquidation procedures. The monetary policy operations, whether through unconventional open market operations or indirect funding of ad hoc vehicles, would need to stabilise the sovereign debt market to break the link between counterparty and country risk, which has boosted adverse selection and frozen the interbank market. Common EU recovery and liquidation procedures, on the other hand, would further promote banks' business integration and international diversification. An independent authority would implement these rules, with access to a resolution fund or a common deposit guarantee scheme.

Suggested Citation

  • Diego Valiante, 2012. "Last Call for a Banking Union in the Euro Area," Applied Economics Quarterly (formerly: Konjunkturpolitik), Duncker & Humblot, Berlin, vol. 58(2), pages 153-170.
    • Handle: RePEc:aeq:aeqaeq:v58_y2012_i2_q2_p153-170
    DOI: 10.3790/aeq.58.2.153
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    Citations

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    Cited by:

    1. Diego Valiante, 2015. "Banking union in a single currency area: evidence on financial fragmentation," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 7(3), pages 251-274, August.
    2. Gros, Daniel, 2013. "The Asset Quality Review and Capital Needs: Why re-capitalise banks with public money?," CEPS Papers 8775, Centre for European Policy Studies.
    3. Federico Steinberg & Mattias Vermeiren, 2016. "Germany's Institutional Power and the EMU Regime after the Crisis: Towards a Germanized Euro Area?," Journal of Common Market Studies, Wiley Blackwell, vol. 54(2), pages 388-407, March.

    More about this item

    Keywords

    banking union; EMU; eurozone; crisis management; ECB; monetary policy; collective action problem; interbank market;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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