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Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve?

Author

Listed:
  • Mathias Hoffmann

    (University of Zurich
    University of Zurich’s Research Priority Program in Financial Market Regulation (URPP FinReg)
    The CESifo Munich
    The Australian National University)

  • Egor Maslov

    (University of Zurich’s Research Priority Program in Financial Market Regulation (URPP FinReg)
    The University of Zurich
    The Swiss Finance Institute (SFI))

  • Bent E. Sørensen

    (University of Houston
    The Centre for Economic Policy Research (CEPR))

  • Iryna Stewen

    (University of Zurich’s Research Priority Program in Financial Market Regulation (URPP FinReg)
    Johannes Gutenberg University Mainz)

Abstract

We study channels of risk sharing in the EMU before and after 2008, when the Great Recession started. Empirically, higher cross-border equity holdings and more direct bank-to-nonbank lending are associated with more risk sharing while interbank integration is not. Equity market integration in the EMU remains limited while banking integration is dominated by interbank integration. Further, interbank integration proved to be highly procyclical, which contributed to a freeze in risk sharing after 2008. Based on this evidence, and results from simulations of a stylized DSGE model, we discuss implications for banking union. Our results show that direct banking integration and capital market integration are complements and that robust risk sharing in the EMU requires integration on both fronts.

Suggested Citation

  • Mathias Hoffmann & Egor Maslov & Bent E. Sørensen & Iryna Stewen, 2019. "Channels of Risk Sharing in the Eurozone: What Can Banking and Capital Market Union Achieve?," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 67(3), pages 443-495, September.
    • Handle: RePEc:pal:imfecr:v:67:y:2019:i:3:d:10.1057_s41308-019-00083-3
    DOI: 10.1057/s41308-019-00083-3
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    Cited by:

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    3. Ferrari, Alessandro & Rogantini Picco, Anna, 2023. "Risk sharing and the adoption of the Euro," Journal of International Economics, Elsevier, vol. 141(C).
    4. Hannes Böhm & Julia Schaumburg & Lena Tonzer, 2022. "Financial Linkages and Sectoral Business Cycle Synchronization: Evidence from Europe," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 70(4), pages 698-734, December.
    5. Marius Clemens & Stefan Gebauer & Tobias König, 2020. "The Macroeconomic Effects of a European Deposit (Re-) Insurance Scheme," Discussion Papers of DIW Berlin 1873, DIW Berlin, German Institute for Economic Research.
    6. Hoffmann, Mathias & Okubo, Toshihiro, 2022. "‘By a silken thread’: Regional banking integration and credit reallocation during Japan's lost decade," Journal of International Economics, Elsevier, vol. 137(C).
    7. Kohler, Wilhelm & Müller, Gernot J. & Wellmann, Susanne, 2023. "Risk sharing in currency unions: The migration channel," European Economic Review, Elsevier, vol. 158(C).
    8. Kleimeier, Stefanie & Sander, Harald, 2022. "Twenty years with the Euro: Eurozone banking market integration revisited," Economic Modelling, Elsevier, vol. 114(C).
    9. Markus Sihvonen, 2023. "Equity Home Bias in a Capital Market Union," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 71(4), pages 953-999, December.
    10. Martín Fuentes, Natalia & Born, Alexandra & Bremus, Franziska & Kastelein, Wieger & Lambert, Claudia, 2023. "A deep dive into the capital channel of risk sharing in the euro area," Working Paper Series 2864, European Central Bank.
    11. Antonia Díaz, 2020. "Common Fiscal Capacity Is Needed to Strengthen Risk Sharing," Intereconomics: Review of European Economic Policy, Springer;ZBW - Leibniz Information Centre for Economics;Centre for European Policy Studies (CEPS), vol. 55(4), pages 215-219, July.

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    Keywords

    E21; E32; E44; F30; F36; F40; F45;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F30 - International Economics - - International Finance - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F45 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Macroeconomic Issues of Monetary Unions

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